The Facts Behind Gas Price Increases

FROM THE JUNE ISSUE: The facts show that this spring's increase in gas prices wasn't due to ethanol.
By Geoff Cooper | May 17, 2019

The kids are out of school, beaches are full and vacations are happening. Summer is here, officially. Doctors will tell you to apply sunscreen liberally, but there’s an extra step you might need to take to avoid getting burned this summer: looking for the best deal on gas prices.

The U.S. Energy Information Administration expects gasoline pump prices to peak in June at $2.83 per gallon, and then slowly drop to $2.66 per gallon in September, the official end of the U.S. driving season.
The only thing more predictable than the increase in summer prices at the pump is the finger pointing that comes with it. This year was no exception and ethanol’s critics were quick to claim that the floods that plagued the Midwest in March were behind the rising prices. The culprit, some claimed, was a lack of ethanol stranded by rising water and submerged rail lines that prevented refiners from blending the needed fuel. 
Sometimes the lies get so deep you need hip waders.

The facts are that while the Midwest floods in mid-March did affect ethanol transportation and some individual facilities, ethanol inventories were at record levels. Stocks in most regions, including the Gulf Coast and East Coast, were above year-ago levels. West Coast inventories have been declining since the start of the year, but were nevertheless slightly above the minimum levels experienced in the previous 12 months.
At RFA, we knew the issue wasn’t ethanol, so we decided to take a deeper look at what was really behind the increase in gas prices.

According to our analysis, the increase in gasoline prices Americans began to feel in April was primarily driven by three factors: a surge in crude oil prices since the start of the year; typical seasonal patterns in gasoline pricing, partially reflecting the changeover to summer specifications; and refinery maintenance and unplanned outages earlier in the spring.

Let’s take a deeper look at what we found. 

First, it has long been recognized that crude oil prices are the primary driver of gasoline prices. 

Crude oil prices sold off sharply in late 2018 and then rebounded sharply in the first quarter of 2019, and gasoline prices followed. Since late December 2018, crude oil futures prices increased by approximately 40 percent, while gasoline (RBOB) futures went up by roughly 50 percent.

By comparison, ethanol futures prices have increased only about 5 percent. In fact, ethanol prices were (and remain) at a steep discount to gasoline prices for most of 2018 and 2019, with ethanol futures in April trading at a 60 cent-per-gallon discount to gasoline futures. The discount to competing sources of octane is even more pronounced.

Second, gasoline prices have a marked seasonal trend. As explained by the EIA, “Retail gasoline prices tend to be lowest in the winter months (December to February) before increasing in the spring. This trend occurs, in part, because refineries begin producing summer-grade gasoline, which is more expensive to manufacture, in February and March after they have produced enough winter-grade gasoline to last through the winter driving season.” The increase in 2019 was simply accelerated because of the strong rebound in crude oil prices.

Third, refinery outages were plaguing the market. According to a blog post by AAA in early April, refinery maintenance work “hit some unexpected bumps in the road, leading to higher pump prices as the nation settles into spring.” According to data from the EIA cited by AAA, total domestic refinery utilization fell to 86.4 percent during the last week in March, while the previous year it was at 93 percent. “The year-over-year difference underscores the impact of unplanned refinery maintenance on markets across the country ... which has led gasoline production to tighten,” according to AAA analysis.

As sure as the changing of the seasons and the increases in summer prices at the pump, we’ll always see ethanol’s critics pointing the finger. But this year, we’re hopeful that some facts and a sober analysis can help consumers recognize what’s really driving the prices at the pump, and avoid getting burned.


Author: Geoff Cooper
President and CEO
Renewable Fuels Association
202.289.3835
gcooper@ethanolrfa.org