Refiners' cutbacks help boost average U.S. gasoline price to $1.94

Pumping gasoline Oil prices have remained relatively low but average U.S. gasoline prices have risen about 25-30 cents in the past two months -- and in the winter, no less. That would suggest to some consumers that something fishy is going on in the gasoline market.

In reality, not really: it's just the market. The main reason for the rise in the national gasoline average to $1.94 per gallon concerns refiners' decision to cutback gasoline production by closing refineries after gasoline margins fell over the past year.

The most recent weekly petroleum report [pdf] by the U.S. Energy Information Agency indicated that U.S. refineries operated at 82.4% of capacity for the week ended February 13, 2009, compared to 85.5% for the same period a year ago.

In other words, about 20% of the infrastructure used to make gasoline is not being used. Add that to relatively constant gasoline supply and the unique gasoline blends required for selected markets (such as California) and the result is a pop in gasoline prices over the past two months -- despite the fact that the price of crude oil remained relatively stable in the $35-$50 range.

During the past week, gasoline prices averaged $2.27 in San Diego, $1.81 in Denver, $1.88 in Atlanta, $1.92 in Boston and $2.01 in Miami, according to the Lundberg Survey, with collects data from about 5,000 stations nationally, CNN reported Monday.

Sneaky refiners? No, savvy refiners

The action by refiners may strike some as being unfair -- particularly on the heels of last year's record-high prices. But again, it's just market forces at work. There are no federal or state price caps for gasoline, nor any production quotas, in the United States and refineries are free to make as much or as little as they want and charge as much as they want, based on market conditions. And over the past six months, refiners' gasoline margins fell, as a result of declining gasoline consumption, due to the recession. So what did refiners' do? They naturally cut gasoline production because profits per gallon weren't large enough, and concentrated production on other refining products. The cutback eliminated some excess supply in the market, and prices rebounded, to the levels we see today.

Still, even with the 25-30 cent pop in prices in the past two months, consumers should keep in mind gasoline prices are still relatively low. Prices are $1.16 per gallon lower than they were in February 2008, according to Lundberg Survey data, CNN reported, and they're way below the plus-$4 per gallon record-highs set in the summer of 2008.

Gasoline Analysis: The outlook of gasoline prices heading into spring? Provided oil prices remain constant at $35-45 per barrel and gasoline use continues to decline, prices should remain about the same or decline slightly over the next six months. Historically, gasoline prices rise in the spring, in-line with gasoline consumption increases at the start of the summer driving season. However, the U.S. recession has taken so many motorists off the road due to job lay-offs, gasoline consumption is expected to remain flat, putting a damper on prices.

For investors, that uncertainty regarding gasoline consumption and oil prices should provide pause for thought before considering an integrated oil company or a related oil investment.
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