Drivers of the recent rise in U.S. gasoline prices

On July 2, the average price at the pump for regular gasoline in the United States was $3.36 per gallon, the lowest level since the first week of 2012. Since then, retail prices have increased more than 36 cents to reach $3.72 per gallon on August 13 (Figure 1). The major driver behind this increase is the strength in the global crude oil market; the price of Brent crude oil, the crude price linked most closely to U.S. product prices over the past 18 months, has climbed more than $25 per barrel since late June. However, crude oil price increases are not the only factor behind the rise in gasoline prices. Outages at several U.S. refineries have caused tightness in gasoline markets and led to regional divergence in retail prices.

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As crude oil is the major cost component of retail gasoline, crude oil price changes are typically reflected in price changes at the pump. Since reaching a year-to-date low of $89 per barrel in late June, the spot price of Brent has steadily increased, settling at $114 per barrel on August 14. Crude oil prices have risen since the start of July on expectations that policymakers in the European Union, China, and the United States would provide additional economic stimulus to counteract slowing growth. Additionally, the imposition of sanctions on Iran, threats by that country to block oil from transiting the Strait of Hormuz, the possibility that Israel might act unilaterally against Iran's nuclear facilities, and other continuing conflicts in the Middle East have triggered market anxiety and prompted upward price pressure. More recently, concerns about reduced production in the North Sea (where Brent crude is produced) due to maintenance activity, along with some stronger-than-expected economic data releases in the United States, have also supported higher crude oil prices.

Refinery outages in the United States have also contributed to tightness in the wholesale gasoline market. In late July, issues at several refineries in the Midwest increased pressure on Chicago wholesale gasoline prices. This situation was exacerbated when a spill on Enbridge's Line 14, which delivers crude oil from Canada to refineries in the Chicago area, caused a closure of the pipeline. Spot prices for conventional gasoline in Chicago spiked from $2.69 per gallon on July 25 to $3.29 per gallon on August 1. While wholesale prices since have retreated somewhat following Line 14's reopening, retail prices in the Midwest (PADD2), as of August 13, remain 27 cents per gallon above July 30 levels. The increase in Midwest prices from July 30 to August 6 is the third largest one-week increase in the region since the U.S. Energy Information Administration (EIA) began tracking those data in 1992, exceeded only by increases that coincided with hurricanes in 2005 and 2008.

An August 6 fire at Chevron's 245,300-barrel-per-day (bbl/d) Richmond, California refinery pushed wholesale prices higher on the West Coast. On news of the fire, Los Angeles spot prices increased more than 32 cents per gallon from $2.88 per gallon on August 6 to $3.21 per gallon on August 7. However, reports that gasoline-producing units at the Richmond refinery could possibly continue to run, along with market slack due to recent export flow from the West Coast, tempered increases in the Los Angeles spot market. By week's end, prices in Los Angeles had shed about 7 cents per gallon from the peak on August 7. Retail gasoline prices in California jumped 23 cents per gallon from August 6 to hit $4.10 per gallon on August 13.

Trade press reports currently indicate the crude distillation unit at the refinery could be down four to six months. The impact on gasoline prices will depend on the extent to which the refinery's secondary gasoline-producing units continue to operate, the flexibility of other West Coast refineries (including Chevron's El Segundo refinery) to produce additional gasoline, and the availability of gasoline supplies from outside the region.

Absent additional refinery outages, and once current outages are addressed, EIA expects average retail gasoline prices to ease through the end of 2012. In its August Short-Term Energy Outlook, EIA projects the average U.S. retail gasoline price will be $3.48 per gallon in September and continue to fall, reaching $3.25 per gallon by the end of the year. With Brent projected to fall from its current price level to average about $102 per barrel over the last four months of the year, lower crude oil costs are expected to pass through to retail gasoline prices. However, regional disparities in gasoline prices are expected to remain, with December retail prices expected to range between an average of $3.52 per gallon on the West Coast (PADD 5) and $3.09 per gallon on the Gulf Coast (PADD 3).

Forecasting prices involves a high degree of uncertainty. The price structure of futures and options traded for New York Harbor Reformulated Blendstock for Oxygenate Blending (RBOB) gasoline provides an indication of the uncertainty expected by futures market participants. The November 2012 RBOB futures contract averaged $2.56 per gallon for the five trading days ending August 2 and has a probability of exceeding $2.80 per gallon (equivalent to a retail price of about $3.50 per gallon) at expiration of approximately 26 percent (Figure 2). The same contract as of the five trading days ending June 1 had a 23 percent probability of exceeding a retail price of $3.50 per gallon.

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