As temperatures continue to soar across the United States, another consequence is following suit: gas prices are on the rise. The national average for a gallon of regular unleaded has soared to $3.71, reaching an eight-month high, according to AAA motor club. Experts attribute this surge in pump prices to steadily increasing oil prices, as oil accounts for nearly half the cost of a gallon of gas. However, the ongoing heat wave gripping the nation is further exacerbating the situation, causing some refineries to struggle to run at maximum capacity.
Extreme heat poses challenges for refineries that convert oil into usable products like gasoline. When ambient temperatures reach the scorching 100-degree neighborhood, running refineries at maximum levels becomes difficult. As a result, refineries in certain regions are experiencing lower or falling utilization rates, leading to the uptick in gas prices in those areas, explains Patrick DeHaan, head of petroleum analysis at GasBuddy, a platform that helps people find affordable gas.
Refinery utilization nationwide has decreased by 0.9 percentage points from the previous week to 93.6%, with gasoline production and distillate fuel production also showing declines. West coast refineries posted the largest drop (2.4%) in utilization, followed by the Gulf Coast with a 1.5% decline, and the Midwest with a 1.1% slide. However, the Rocky Mountains and East coast regions witnessed a rise in utilization.
Oil prices, the primary contributor to gas prices, have also surged by $10 per barrel in July, reaching a three-month high. Raw crude price increases add approximately 24 cents per gallon to the cost of gasoline and other refined products, says Tom Kloza, global head of energy analysis at Oil Price Information Service. Production cuts from the Organization of the Petroleum Exporting Countries (OPEC) and its allies, along with sanctions on Iran, Venezuela, and Russia, have impacted global crude supply, further driving up oil prices.
Exports of gasoline from the United States to Latin America are also reducing domestic supply, as the country has become the supplier of choice for the region. While some may wonder if gas stations are taking advantage of the situation, experts suggest that is not the case. Retail gasoline margins are around 27 cents per gallon now, about one-third of what they were a year ago. Most retailers need something above 30 cents per gallon to maintain reasonable fuel profits, but for now, the primary beneficiaries of the energy price inflation are crude producers and refiners.
Regarding the future outlook for gas prices, it may depend on refinery operations and weather conditions. If refineries experience more downtime or if hurricane-related disruptions occur in the Gulf of Mexico, we could witness substantial gasoline price drops, even if crude oil remains above $80 per barrel, explains Kloza.
As the heat wave persists and oil prices continue their ascent, consumers will need to brace for potentially higher gas prices in the short term. However, fluctuations in refinery operations and the possibility of weather-related events could bring some relief in the coming weeks.
