Pump Prices not Bottom of the Barrel: Why Aren’t Gas Prices Lower Too?

Oil prices have been a huge topic of conversation lately, as the price of crude oil continues to fall. In this month alone prices have fallen to the lowest point in years. While energy market investors are wrestling with these market realities, those of us at the pump may be wondering why fuel costs haven’t fallen at the same precipitous rate. For example, West Texas Intermediate crude is a U.S. benchmark. In the last month, they’ve dropped 15 percent—reaching the cheapest numbers since 2009. Meanwhile, prices at the pump have fallen only 3 percent. A barrel of crude costs $42.61 as of this Tuesday.

The national average for a gallon of regular gasoline is $2.66 according to AAA. While that is still a significantly cheaper price than last year, it’s still above the cost of a gallon last winter.

Industry watchers have a few explanations as to why the pump prices don’t match the fall of the oil prices. First of all, more people drive in the summer and gas prices typically go up to reflect more drivers on the road. Additionally, the blend of gasoline produced this time of year is more expensive to make and store. However, gas prices have also been driven up by trouble in Indiana at a refinery. BP has a refinery in Whiting, Indiana and it happens to be the largest in the nation outside of the Gulf Coast. That particular refinery has been having some major machinery issues and as a result, gas prices in the Midwest—including Indiana and Illinois—have been soaring, as much as nearly 50 cents in one week alone. Michael Green, a spokesman for AAA explained that this is enough to push the national average (for this particular week) up, thereby ending a 27-day streak of falling prices at the pump. Green added that, “just because the national average is jumping doesn’t mean that everybody’s prices are going up.”

Crude oil prices reflect a lot of concerns, including high production numbers, concerns about emerging economies’ growth, and expectations that Iran will export more oil once sanctions are lessened. The U.S. Energy Information Administration suspects that prices will rise early next year, but still remain at lower-than-usual prices. The impact of the Indiana refinery does highlight the divide between the cost of crude oil and the price consumers face at the pump. Tom Kloza, head analyst at the Oil Price Information Service explained that, “Gasoline can’t be stored as easily as crude oil, so hiccups in the supply chain can quickly hike up prices, making for a market prone to big swings. Gasoline blends in the summertime are also harder and more expensive to make because environmental regulations require mixtures that don’t evaporate as quickly. Fewer refineries can meet those standards, meaning supply is lower, and the raw materials are pricier.”

Gasoline consumption is up though—thanks to an improving economy and cheap prices compared to last year. The U.S. Energy Information Administration says demand for gasoline is up 6.6 percent compared to last year. That should continue as the summer driving bump dies down with fall, the Indiana refinery recovers, and prices continue to drop at the pump as well.

The ripple effects of all these factors will continue to influence both the energy market and pump prices, as big global shifts like Iran sanction easing and more local changes, like the Indiana refinery’s recovery, have a direct impact on consumers’ wallets and portfolios. If you are curious or concerned about your family’s wealth in relation to the energy market, contact an expert at Apex Financial Advisors today. We can help you find the great investments at a good time, to protect and grow your wealth over time.