How Are Gas Prices Really Determined? You'd Be Surprised

One of my biggest pet peeves is a bunch of uninformed reporters who lack command of the topic. 

Basically it works like this: 

  • "Expert A says gas prices will do x"
  • People in the media take it and run with it
  • Generally whatever "it" is, is often misguided and whatever happens to be the most sensational "expert account" gets the attention

Starting on Friday, there were reports readily available suggesting quick increases at the pump of 30 to 50 cents per gallon. Today, I've even heard $1 per gallon! 

On Friday, there was no measurable impact on short-term prices due to Harvey. By Monday morning, however, there was a 2 cent per gallon tangible impact I was able to ID based on wholesale orders for fully refined gas. 

Looking at the wholesale refined market one to two weeks out... yesterday the upper end of price increases was between 13 to 15 cents per gallon. This morning, that figure is 18 cents on the high end.

There are three main factors:

  • Currency
  • Supply
  • Demand

The US Dollar Index dropped a bit yesterday, as did the the price of oil as Harvey largely missed rigs in the Gulf and demand has dropped significantly with millions of people using very little oil in the impacted areas as they've been sheltering. 

Absent from the media’s coverage of oil and gas prices is the role that currency actually plays with all commodities. From Texas to Kenya… if you’re buying a commodity, you’re paying in US Dollars. Now for what you're paying for when you buy a gallon of gas. This is the average: 

  • 65 percent based on price of oil
  • 14 percent refining
  • 13 percent taxes (Federal to local)
  • 8 percent distribution/transportation

Those are the wholesale costs. Additionally, retail margins by your local gas station typically add 3 percent to the final costs (it's a very low margin business). 

So the first important consideration is understanding what the potential liability is from a refining issue and, as you can tell, it's generally a very distant 2nd from a cost standpoint. 

This is much different that a Katrina type storm that dramatically disrupted oil supplies in the region. As of this entry approximately 19 percent of refiners are offline in the US (that's 1 percent more than yesterday at this time) . 

That being said, many refiners weren't at max capacity previously and can pick up a bit of slack if needed. Supplies were also high prior to Harvey impacting. 

So unless there's a systemic issue with refiners not being able to get online over an extended period of time, it's unlikely that price increases would be much beyond what I cited above. 

As of now, no pipelines have been impaired that carry refined gas out of the gulf.

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