Explanation: What is happening with gasoline prices in the United States?

Chevron hydraulic fracturing site near Midland, Texas, USA, August 22, 2019. REUTERS / Jessica Lutz / File Photo

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Nov. 24 (Reuters) – The United States uses more gasoline than any other country in the world, and Americans have recently become concerned about rapidly rising costs at the pumps.

The White House on Tuesday announced plans to release millions of barrels of oil from strategic reserves in coordination with other countries in the hope of cutting costs. Read more

The average retail price of gasoline was just recently $ 3.40 for a regular gallon, down from around $ 2.11 at the same time a year ago. The rapid increase – 61% over 12 months – has alarmed consumers.

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According to the American Automobile Association, 48.3 million people are expected to hit the roads for Thanksgiving, nearly 4 million more than last year, although still below 2019 levels.

HAVE GASOLINE PRICES EVER BEEN THAT HIGH?

Yes. The cost of a gallon of regular gasoline hit $ 4.11 in July 2008. The current cost is still significantly lower than that, but such a rapid increase is rare.

WHAT IS THE DIFFERENCE BETWEEN WHOLESALE TERMS AND GASOLINE RETAIL PRICES?

President Joe Biden, in his remarks on releasing oil from the strategic reserve, said prices are expected to be about 25 cents lower than they are now.

It refers to the current spread between unfinished gasoline futures known as RBOBs and retail prices, which has widened as the RBOB has fallen in recent weeks as the retail cost has remained relatively stable.

Over the past six weeks, that spread has widened from about 78 cents to about $ 1.14 per gallon, the highest since April 2020. That’s significantly wider than the five-year average of around 85 cents.

Wholesale prices often diverge from retail prices when the former fall sharply, as retailers generally react to such changes with a lag. In March 2020, the gap widened to $ 1.64 per gallon as wholesale prices collapsed as the coronavirus pandemic worsened as Saudi Arabia and Russia flooded the market with barrels . He did not return to a more normal range for two months.

In November 2018, the spread dropped to $ 1.11 and took several months to narrow.

Retail gasoline prices exceed wholesale costs due to refining, transportation, marketing and taxes, and the gap between the two tends to fluctuate – with retail prices often falling more slowly.

WHAT IS INCLUDED IN THE PRICE OF GASOLINE?

There are several factors. Crude oil is more than half the cost, according to the US Department of Energy. This price is largely determined by supply and demand around the world.

Consumers pay additional costs for blending ethanol and other additives, as well as for distribution and marketing. These costs have increased dramatically, according to Tom Kloza, global head of energy analysis at the Oil Price Information Service (OPIS).

“The gasoline you get at the pump actually contains eight or nine different elements, all of which have been rising in cost in recent months,” Kloza said.

About 17% of the cost comes from taxes. Federal gasoline tax is 18 cents, while average state taxes and fees are 30 cents, although this varies (see CHART).

State average of gasoline taxes and charges.

HOW DOES THE RELEASE OF CRUDE RESERVES AFFECT FUEL PRICES?

The release of the US Strategic Petroleum Reserve would be a combination of a loan and sale to companies, US officials said, for a total of 50 million barrels.

Oil prices fell for several days as the oil market expected a potential announcement. However, because it takes time for a strategic version to make its way through the refining process, drivers likely won’t see prices at the pump drop when they hit the road for the Thanksgiving holiday in the United States on Thursday. .

“The price relief is unlikely to be passed on to consumers in the short term, unless the Biden administration prioritizes releasing gasoline inventories,” said Louise Dickson, senior market analyst. tankers at Rystad Energy.

WHAT ELSE CAN BE DONE TO LOWER PUMP PRICES?

In response to rising gasoline prices in his state, Florida Governor Ron DeSantis on Monday urged lawmakers to consider removing the state’s gasoline tax, which is used to fund infrastructure. of public transport. Florida state taxes and fees total nearly 35 cents, above the national average.

“Other Republican-leaning states could follow suit, especially if they argue that the revenues will be made up of funding for the federal infrastructure bill,” Kloza said.

WHERE ARE THE PRICES OF GASOLINE AFTER THIS WEEK?

Gasoline prices are expected to drop in the coming weeks, but this is largely due to lower demand for fuel during the winter months, according to Kloza.

When demand for gasoline returns, American consumers will likely return to the pumps, but the ability to refine oil is diminished after a year in which even major refineries around the world have closed.

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Reporting by Laura Sanicola in New York Editing by Matthew Lewis and Louise Heavens

Our Standards: Thomson Reuters Trust Principles.

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