Evidence of the influence that refiners' activities have over the price of gasoline at the pump has been on full display in the U.S. the past few weeks. Across the country, prices have been creeping up as the crack spread – the margin between what price refineries purchase crude at and what they sell it for as a finished product – has risen to $30.45/barrel. This figure is greater than three times the five-year average of $8.51. Contributing factors to this outsized spread have included refinery maintenance schedules, unforeseen mishaps, and shutdowns of entire plants. When supplies are tight, events such as these expose this relationship even more.
While the U.S. is becoming less and less dependent on oil imports, disruptions in international refining capacity, especially in Canada and Europe, can have a dramatic effect on the prices that we pay. Maintenance in both of these areas has pushed gasoline inventories along the Atlantic coast to 12-year lows. The largest refinery in Europe, run by Royal Dutch Shell (NYSE: RDS-A), has taken the key out of its Netherlands-based operations for scheduled maintenance. Almost in tandem, Valero (VLO +0.46%) decided to work on its Pembroke refinery in Wales for eight weeks. Add to this recent supply disruptions at refineries in California, and prices of gasoline have been spiking across the country.
California has seen the brunt of the price increases do to its own unique circumstances. They started with a fire at Chevron's (CVX 1.60%) Richmond plant and above-normal levels of chloride in one of its largest California pipelines that have hampered significantly its traditional amount of production. ExxonMobil (XOM 1.57%) has also shut down refinery capacity because of power failure at its Torrance location. This capacity is slowly coming back on board. Because of all of this residents in the state have seen the price per gallon jump $.040 this week -- $0.20 between Thursday and Friday alone.
Several factors have led to California being more price elastic than the average state with regards to refinery operations. The main two are that they have unique specifications for summer gas to reduce smog levels, and they have reduced exposure to the circulatory system of oil pipelines that snakes its way through the states. Because of this, there is a limited amount of supply to the refiners there and gas can't be shipped in from other states because it won't meet California's requirements. California's Air Resources Board and Energy Commission are currently discussing the possibility of suspending their summer-blend requirements to help alleviate some of the current strain. Unfortunately, no decision has been reached as of today.
While this pain is tough to bear for many Americans, prices are expected to start stabilizing and then revert to normalized levels as we get closer to November, when most scheduled maintenance is expected to end. It helps that refiners, including the ones listed in this article, are likely anxious to get their plants up and running in order take advantage of the current, above-the-mean crack spread. Taking advantage of this could lead to a healthy start to the fourth quarter of 2012. Once this reinvigorated supply comes back on board we should begin to catch a break at the pump.
