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Two Reasons Why Gasoline Prices Are Soaring

U.S. national average gasoline prices have been rising in most weeks so far this year, and are expected to reach the highest summer prices since 2018. 

Most of the increase has been the result of rallying crude oil prices, the component with the highest weight in the way prices are calculated. Rising gasoline demand compared to the March and April lows of 2020 is also driving prices higher as more Americans travel with the warmer weather and vaccination rollouts. 

Another key component of the U.S. gasoline price—the cost of producing the fuel—is also at play this year, as it has been for most of the past two decades. The switch from winter to summer-grade gasoline drives gasoline prices higher. Summer gasoline is more expensive to produce than winter-grade fuel because of a longer production process and more costly blending components than the fuel sold in the winter. 

It shouldn’t come as a surprise that gasoline prices in the United States have been rising this year. Typically, prices are going up ahead of the refineries’ switch to summer-grade gasoline, Robert Rapier, a chemical engineer in the energy industry, writes in Forbes. In around 90 percent of past years, gasoline prices in America rose between January and May, Rapier said, noting the exception from last year, when the pandemic and the collapse in prices led to significant declines in gasoline prices.  

Yet, the production of summer-grade gasoline is just one of the reasons for higher gasoline prices. The largest determining factor of U.S. gasoline prices is the trend in crude oil prices, whose rally has pushed up gasoline prices more than in previous years.

Gasoline prices in the U.S. are primarily driven by four components: crude oil prices, refining costs, retail distribution and marketing costs, and taxes. Since taxes and retail distribution costs are generally stable, the biggest factors in gasoline price trends are changes in oil prices and refining costs, the EIA says.

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At the end of March, U.S. gasoline prices had increased for 17 consecutive weeks—the longest streak of rising national average gasoline prices since 1994, according to EIA’s surveys. 

On March 29, the U.S. regular retail gasoline prices averaged $2.85 per gallon, when it dropped two cents compared to the previous week for the first weekly decline since November 2020. It was in November that crude oil prices started to rise following the first good news about vaccine candidates.

This summer, U.S. gasoline prices are expected to be the highest since the summer of 2018, according to the latest estimates of the Energy Information Administration. 

“More vaccinations combined with the U.S. fiscal stimulus should support continuing economic recovery, which will drive petroleum demand growth,” the EIA said in its Summer Fuels Outlook

This year’s summertime gasoline consumption will average almost 8.8 million bpd, up by 1.0 million bpd, or 13 percent, compared to 2020. Demand, however, will still be 700,000 bpd, or 7 percent, down compared to the pre-pandemic summer of 2019.

Last week, average U.S. gasoline prices were at a “stubbornly high” $2.87 a gallon, despite the recent pullback in oil prices. Gas prices are now up by $1.01/GAL from last year, Patrick De Haan, head of petroleum analysis for GasBuddy,

on Thursday. 

On Sunday, April 11, the national average was little changed, at $2.864/gal, as per AAA estimates. 

Despite those higher prices than in the past few years, especially compared to last year’s lows, monthly average gasoline prices are set to drop from an April peak of $2.86/GAL to an average of $2.78/GAL in July and $2.62/GAL by September, the EIA forecasts in the Summer Fuels Outlook. That’s despite higher gasoline consumption than last year because current expectations are that refinery output will grow through the summer, as will crude oil supply on the market from the OPEC+ group and from U.S. shale. 

“We expect that growth in refinery output and rising crude oil supply from OPEC+ and U.S. tight oil producers will begin to put downward pressure on retail gasoline prices over the summer, despite an expected rise in gasoline demand,” the EIA said. 

The national average may not hit $3/GAL this summer, but rising crude oil prices and the switch to summer-grade fuels have combined to potentially push U.S. summer gasoline prices to the highest since 2018.  

By Tsvetana Paraskova for Oilprice.com

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