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Business, Energy, STEM

What Causes Gasoline Price Spikes?

GasPump_DresserWayne_GreeceIt’s the first full week of October. Autumn arrived along with a burst of color and an increase in falling leaves about two weeks ago. After a hot summer, we’ll all happy to welcome slightly cooler temperatures. It’s also a good time to get an update on gasoline prices. This post will also take a look at some of the causes behind gasoline price spikes.

For starters, today’s U.S. national average price for regular gasoline is $2.226 per gallon (Source: GasBuddy.com). This represents a rise of 1.8 ¢ over one week and one month ago.

Since my last post on crude oil, Demand for Gasoline is Higher for Labor Day Weekend 2016, about one month ago, two significant events caused a few ripples for U.S. motorists: 1) a rupture in the Colonial Pipeline, and 2) a meeting of OPEC members on Wednesday, September 28, 2016, in Algiers, Algeria.

The Los Angeles Times and other news outlets reported that on Friday, September 16, 2016, Colonial, the largest U.S. refined products pipeline system, shut down its main gasoline and distillate lines that run from the Gulf Coast refining hub to the East coast after a leak was discovered in Shelby County, Alabama. The company estimated that the volume of the spill ranged from 6,000 to 8,000 barrels.

Folks at Colonial jumped thru hoops to get the pipeline up and running a week later. Not unexpected was the disruption to the local gas supply with the most impacts seen in several southeastern states. Line 1 brings gasoline from Houston to Greensboro, North Carolina, and on another line that ends in Linden, New Jersey. It was reported that gasoline prices spiked up an average of 20 ¢ per gallon in the southeast, however, higher prices were also reported.

The disruption that was caused by the failure in Colonial’s pipeline reminded me of the Kinder Morgan pipeline rupture in Tucson, AZ on July 30, 2003 that sprayed 16,548 gallons of gasoline on five houses under construction, and flooded nearby streets with gasoline. The ruptured pipeline that transports gasoline from Tucson to Phoenix caused major gas shortages and price increases across the state, although there was never a shortage of gasoline. Needless to say not only did gasoline prices spike, a handful of retail outlets were accused of price gouging when they raised their per gallon cost upward to $5.00.

That brings me back to the question, what is the cause of gas price spikes?

Jarrod Gilmore of the Christian Science Monitor answers that question in a an earlier post [Ref 1]. While there is no silver bullet or one answer to the question, a variety of factors are at play – some seasonal, some state-specific, some globally significant, and some the result of unpredictable natural disasters. Gilmore identifies five (5) key factors that influence gas prices:

  1. Oil: A volatile commodity
  2. The summer premium
  3. How about that weather?
  4. Geography matters – just ask Hawaii
  5. Closed for maintenance

The rupture of the Colonial pipeline a few weeks ago as well as the Kinder Morgan rupture back in 2003 both appear to fit best under Key Factor #5 in explaining why prices in the affected areas rose 20¢ or more a gallon as localized gas shortages were created when refined product failed to arrive in a timely manner at gasoline terminals which caused some retail outlets to run out of gasoline.  While most refineries schedule down time and maintenance, the ruptures in these two important gasoline pipelines were not planned outages.

On a similar but different note, the members of OPEC issued a news release following their 170th meeting last week. OPEC members agreed to cut its oil output for the first time since 2008! The group has agreed to reduce output to 32.5 million barrels per day (bpd) from current production of 33.24 million bpd. However, the amount that each country will produce is to be decided at the next formal meeting of OPEC in November, when an invitation to join cuts could also be extended to non-OPEC countries such as Russia, sources said.

On the above announcement, crude oil prices spiked more than 5 percent to trade above $48 per barrel after the outcome of OPEC’s informal meeting in Algeria took traders by surprise.

CNBC reported that Brent crude was up was up 13 cents at $51.02 a barrel by 11:19 a.m. ET (1519 GMT). It rose to $51.37 at the session peak and its highest since June 10. Earlier, Brent fell to $50.34 and closed out Monday, October 3, 2016 at $50.89. Similarly, U.S. West Texas Intermediate (WTI) crude was down 3 cents at $48.78. The session high for WTI was $49.13, its highest since July 5.

The U.S. Energy Information Administration (EIA) estimates that the cost of crude oil makes up roughly 67 percent of the price of gasoline. Suffice it to say that some but not all of the spikes and other fluctuations in gasoline prices can be tracked back to crude oil prices.

The long-term impact of OPEC’s recent cap in production remains to be seen. In the meantime, with cooler weather comes falling leaves. Instead of staying inside, October is a good time to check out the fall foliage in your area.

Until my next post, happy motoring!!!

Sources Cited:

  1. Why do gas prices rise and fall? 5 driving factors, by Jared Gilmour, Staff writerin Energy/Environment, October 31, 2014, http://www.csmonitor.com/Environment/2014/1031/Why-do-gas-prices-rise-and-fall-5-driving-factors/Closed-for-maintenance

 

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About Vi Brown

Vi is principal and CEO of Prophecy Consulting Group, LLC, an Arizona firm that provides business and engineering services to private and public clients. Prior to establishing her consulting practice in 2001, Vi worked with Motorola, Maricopa County Government, Pacific Gas & Electric, CH2M Hill, and Procter & Gamble. As an adjunct faculty member, Vi teaches undergraduate calculus classes and graduate level environmental courses. She is also a professional speaker.

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  1. Pingback: Colonial Pipeline Does It Again and #Tanksgiving for Your Gas Tank | BridgeBizSTEM - November 2, 2016

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