What's With the Price at the Pump?

Hello gentle readers. Today I bring you glad tidings of a public service announcement and an admonition to steer clear of magical, wishful thinking and disinformation found in the Face Book cesspool of lazy economic thought.  

Consider the cost of a gallon of petrol nowadays – more than a dollar higher than what it was a year ago. Even higher in some parts of the country (be grateful you do not live in LA County).  

On Face Book it is implied that presidents set the price of gasoline.  We all know that is silly. Nevertheless, I understand that economics is sometimes hard to wrap your mind around so here’s a simple explanation to keep the facts straight.

There are three principle causes of higher gas prices – with the largest contributor being higher crude-oil prices. At 43%, the largest driver of the cost of a gallon of gasoline is the price of crude oil. Refining and profit margin are 25%, state and federal taxes 22% followed by distribution and marketing at 10%.

 

Crude oil prices are considerably higher today than a year ago (see chart). So, if you’re pining for the days of yore when gas was cheap you need to consider embracing the Covid restrictions, lock downs, global collapse of travel, tens of millions of unemployed and a tanking economy that contributed to the collapse of crude oil prices. My recollection of that hot mess is still quite fresh and I want nothing to do with it.

 

 

The second contributor to the recent rise in gasoline prices is growing demand as workers return to the office and resume commutes. Our rocketing economic expansion is the contributor to this. Last Friday I was witness to an extended wait to cross the four lane highway to run an errand. The northbound traffic was a solid and seemingly endless line. Some might grumble at the wait. I saw room taxes, vacation spending, restaurant meals and winery visits. All of it principally fueled by an increased demand for gasoline.

 

If you were to talk to the people over at AAA they would tell you that the post-Covid pent-up demand of American motorists is expected to set record highs in July and August for fuel consumption. Demand (get ready for this) is going to push gasoline prices even higher.

 

The third (and smallest) contributor is another of those nagging supply-chain issues. While gasoline inventories are ample - there is a shortfall of truckers as a consequence of job losses in the recession of a year ago. This shortage of truckers in some regions has resulted in supply bottlenecks in some places. 

 

The price at the pump has nothing to do with canceling the permits for Keystone XL. That project was conceived to move low-grade tar sand crude to the gulf coast for export overseas. And after more than a decade of controversy was still years from completion.  Biden energy policy may have a long term impact on energy prices – yet we’re less than six months into his administration making it too soon to know precisely how and where.

One final thought. There is a silver lining here if you look for it. Plenty of folks work in the oil patch at multiple levels. A year ago petroleum engineers and refinery workers were being furloughed in record numbers. Today the oil patch is humming-along and trying to keep-up with demand. That’s a good thing and best evidence of a growing economy.  And for us retirees who belong to the investor class - energy and related shares are rocking the nest egg.

Raising a toast to the 2021 road trip.....