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What determines gas prices?  |  InvestorPlace


  • Oil prices are determined by supply and demand.
  • Refining capacity is declining and industry is moving to the Middle East.
  • The tools against demand are in our hands, but most will take years to deploy.

Source: Laura Gangi Basin / Shutterstock.com

If you’re wondering what drives gas prices, the easy answer is that gas prices are determined by supply and demand. However, it is more complicated than that.

It takes months of oil to get from the wellhead to your gas tank. During this time it is transported, refined and transported again. Each player in this dance seeks maximum profit. They are limited only by their own revenue needs and the cost of holding inventory. No one has found a better way to ration scarcity than price.

Storage Matters

Keys to today’s gas prices can be found in this chart and spreadsheet, from the Energy Information Administration.

The chart shows how much crude oil is stored in the United States and how long that supply can last given current demand. As of late last year, storage is lower than it was in the previous five years. The amount of stored crude typically peaks as the “summer driving season” approaches, falling into the winter before rising again.

This year it has not increased again. As of June 10, storage represented 25.8 days of supply, according to the EIA. A year ago it was 29.6 days. As U.S. oil production is on the rise — to nearly 12 million barrels a day from 11 million a year ago — producers can hold their ground for their best price.

The Riddle of Refining

The United States is a major oil refiner, but refining hasn’t been big business for decades.

Gasoline, kerosene and fuel oil have different densities. Refining involves heating the oil to separate its components. It’s complicated and dirty.

Half of America’s refining capacity has disappeared over the past four decades. Profits have fallen to just $1-2 a barrel during the pandemic. The last new US refinery was commissioned in 1977. It can take a decade to build a refinery, and with the death of the oil field now in sight, no one wants to make the investment.

When refiners are shut down, for maintenance, upgrading, or to meet government pollution standards, capacity disappears. The remaining refiners squeeze the market for profits. That’s what they’re doing right now, with refining profits hitting $18 a barrel. The Biden administration’s calls to curb “lewd profits” may not outperform the Trump administration’s support for the sector over the past decade.

Nobody wants to spend money over 30 years on something that will go bankrupt in 10 years.

Control of the Saudi market

Between the drop in stocks and the refining shortages, the supply of finished product available on the American market is falling behind demand. The amount of finished gasoline available to send to your local station has dropped nearly 90% since 1990.

Control of refining activity is shifting to the Middle East. Profits from so-called “downstream” activities are skyrocketing. This is why Saudi Aramco, which left full state control in 2019, is now worth nearly four times Apple (NASDAQ:AAPL).

President Biden will soon visit Saudi Arabia, hoping to secure cooperation from Crown Prince Mohammed bin Salman (MBS). Saud control of industry may not last, but it is real.

The essential

The tools to change the oil supply and demand equation are in your hands. The problem is that they will take years to deploy.

Taking Russian oil off the market gives Saudi Arabia and other oil states enormous power. They always invest in downstream companies that Americans are abandoning, based on long-term trends.

Renewable energy is now cheaper than oil. It becomes cheaper than natural gas or coal. But that wasn’t true until recently. The infrastructure needed to get this energy to market is not yet at scale. Although it is evolving, the best response for consumers is conservation.

Conservation is not a message the market wants to hear. But until the fuel from the sun and wind is fully exploited, gas prices will remain high and burning oil for power will remain very profitable.

As of the date of publication, Dana Blankenhorn held a long-standing position with the AAPL. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

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