Why are retail gasoline and diesel prices high relative to crude oil?

WASHINGTON, Oct. 14, 2015 - Gas prices at the pump closely tracked the collapse of crude oil prices in the second half of 2014, but not so in 2015. Brent crude oil prices and U.S. average retail gas prices have a historical relationship that suggests that gas prices in August should have been about $2 per gallon, but instead were consistently above $2.60. A similar result was found for diesel. The gap between predicted and actual gasoline and diesel prices can be traced to the improving U.S. economy and sharply lower crude oil prices, according to a report from FarmDoc Daily.

The analysis, written by Scott Irwin, shows:

·            Improving economic growth in the U.S. and the recent plunge in crude oil prices spurred a notable jump in gasoline and diesel demand.

·            The jump in gasoline and diesel demand pushed capacity utilization rates for the U.S. crude oil refining industry to high levels by historical standards.

·            The high capacity utilization rates caused refining margins, measured by the crack spread, to increase sharply.

·            The increase in refining margins resulted in relatively high retail gasoline and diesel prices compared to crude oil prices.

The good news for U.S. gasoline and diesel consumers is that the pressure on refining capacity appears to be lessening, as indicated by the sharp drop in crack spreads since mid-August, farmdoc daily says. Combined with the normal seasonal drop in miles driven in the autumn and winter months, this should continue to pressure gasoline and diesel prices relative to crude oil prices.

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