October 12, 2012 by Shawkat Hammoudeh
The driving season in the United States, which seasonally pushes gasoline prices higher, is long behind us, but the average national price for gasoline on Oct. 1 in this country was $3.80, which is the highest on record for this time of year. It also seems that there is no important drop in this price for some weeks to come. The gasoline problem is at its worst in California, where the average price for regular reached $4.49 per gallon and in some places exceeded $5 per gallon, which is a record. The culprits include geopolitics in the Middle East, QE3 and the refinery shutdown factor in the United States. The refinery factor is the more relevant for this time of year.
The first two factors have been examined and have been with us before, but the refinery factor is a new influence on the price and deserves more analysis. In the U.S. there are 144 refineries, which are many but not enough. The total refinery capacity is 16.7 million barrels per day. However, there is also idle capacity due to shutdowns, which could be scheduled or not. This time there is more idle capacity in the South because of storms and hurricanes. The refinery problems in California caused shortages and long lines, particularly in Southern California. There is also a refinery problem on the East Coast, which has an average price that is 17 cents higher than the national average. The natural events have damaged some refineries and caused erosions in the pipelines. I believe this is directly responsible for the recent divergence between the price of crude oil and the price of gasoline. In Southern California, some gas stations refuse to buy the more expensive, cleaner summer gasoline and are willing to wait in case the price will drop, which will make them lose money. In Northern California, there is a shortage because of a fire in Virginia at the refinery that supplies that region with gasoline. It also seems that the oil companies have participated somehow in creating the gasoline shortages. The elimination of dozens of refineries since 1995 and the dearth of new refineries have contributed to this shortage. It is possible that the oil companies engage in price gouging through this channel.
It’s known that 60 percent of the price of gasoline is accounted for by the price of oil, and the 40 percent is due to fundamental and special factors related to gasoline. At certain times like this, the 40 percent has more power than the 60 percent. The 60 percent has to do with the globalism of the oil price, but the 40 percent has many regional factors, and now the refinery factor is dominating the 40 percent of the gasoline price. The price of oil has declined by 6 percent so far this year while the price of gasoline has increased by 9 percent. Most of the credit for this 9 percent increase has to do with the refinery factor. But we should keep in mind that the special factors are not long-term factors.
The refinery shutdown problem will be worked out sooner rather than later because of the shale energy revolution, repairs, and end of scheduled maintenance. Here in Philadelphia, the three giant refineries that were closed recently or slated for closure are coming back to life because of the availability of shale energy. The Marcus Hook refinery will be reconfigured to process the natural gas liquid gushing from the Marcellus gas shale, which lies beneath most of Pennsylvania. The Sunoco refinery in South Philadelphia will process crude oil from North Dakota’s Bakken Field and use the Marcellus natural gas as a fuel. A third refinery near Philadelphia will process the Bakken crude oil into jet fuel. In Southern California, gas stations will soon start filling up their gas stations with less expensive gasoline once the April-October cleaner gasoline mandate period expires. In Northern California, the gasoline coming from the Virginia refinery that had caught fire will soon start to flow back.
Shawkat Hammoudeh is an economics professor at Drexel University and can be contacted at firstname.lastname@example.org.