Why Has The Price Of Gasoline Gone Up.

The US Department of Energy’s Energy Information Agency (EIA) says that the recent rise in gasoline prices was due in part to an increase in the cost of crude oil and the “crack price spread”. The average U.S. retail price for regular motor gasoline is up about 45 cents per gallon since the start of 2013, reaching $3.75 per gallon on February 18.  Crack price spread is defined as: “Crack spreads are differences between wholesale petroleum product prices and crude oil prices. These spreads are often used to estimate refining margins. Crack spreads are a simple measure based on one or two products produced in a refinery (usually gasoline and distillate fuel). They do not take into consideration all refinery product revenues and exclude refining costs other than the cost of crude oil.”

The EIA explains the increase this way:

“Between January 1 and February 19, the price of Brent crude oil—the waterborne light sweet crude grade that drives the wholesale price of gasoline sold in most U.S. regions—rose about $6 per barrel, or about 15 cents per gallon.”

“A simple calculation, which modestly understates the role of higher crude prices to the extent that crude price increases during December 2012 were still not fully passed through in retail gasoline prices at the start of 2013, suggests that about two-thirds of the rise in gasoline prices since the start of the year reflects higher gasoline crack spreads. Some of the factors contributing to rising crack spreads (or margins) for gasoline, and therefore to rising retail gasoline prices, include:

• Refinery outages. There have been multiple refinery outages, both planned and unplanned, that reduced U.S. capacity to manufacture gasoline.

• Global demand for petroleum products. Year-over-year global product demand is up, and further rises are expected. That rise in demand affects domestic refinery utilization rates, maintenance needs, and product balances.

• Prior low crack spreads. Throughout much of November and December 2012, gasoline crack spreads were very low, and in some cases negative (a barrel of gasoline was worth less than a barrel of Brent crude oil).”

To illustrate this crack spreads the EIA uses this chart from 2011:

The spread is  part of the margin the refinery needs  to make  continued production of the product economically viable.  It is normally positive but as one can see from the chart, it occasionally goes negative.

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