Monday, May 16, 2022

Why is the price of gas still going up, when oil is going down?

I drive an electric car, so I don't really care about gas prices that much, but I know a lot of people do (get an electric car, I say, and eat cake!)

I have watched from the sidelines as the price of gasoline at the pump has risen inexorably over the last few months, flirting with C$2 a litre here in Ontario, and then spilling over gloriously to find itself at well over C$2 a litre today. I know that there is a whole litany of factors at play in this record-breaking development. But, curiously, one of those factors is NOT the price of crude oil.

Usually, the price of a barrel of oil is the single major deteminant of the pump process of gas, and the two tend to change in lockstep.  This double-axis chart of the price of oil and the price of gas from the Globe and Mail shows just just that, even through the major price increases since the Russian invasion of Ukraine:

But then, suddenly, around 19th Apr 2022, the two indices stopped moving in lockstep. The price of oil has fallen, or at least remained more or less stable in the slighly longer term, apparently weighed down by mounting fears of a recession, pandemic lockdowns in China, and  the release of oil from strategic reserves by several countries in response to Russian sanctions. The price of gas on the highways of Canada, though, has continued to rise. The two prices seem to have competely unlinked and untethered, and the question is: why?

The difference between the price of refined fuels and crude oil, known for some reason as the "crack spread", has been increasing in recent weeks due to: surging demand for jet fuel and diesel as people start to travel more again; surging demand for truck fuel as the delivery industry tries to rectify supply chain woes; increased output of fuels by many oil-producing countries to take up the slack left by Russia; and the general inability of refineries to cope with this increased demand, especially after refinery capacity was pared back during the pandemic. 

Due to all these factors and others, the oil refining industry has been able to charge much higher prices to distributors. So, this time around, it is not so much the oil extraction companies themselves that are reaping the spoils, but the oil refineries that are making out like bandiits, with no end crtrently in sight.



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