Gas prices expected to be up this summer

By Josh Sigler

Gasoline prices are expected be as much as 50 cents higher this summer when compared to 2017, an energy economist from Purdue University told The Paper of Wabash County.

Wally Tyner, the James and Lois Ackerman Professor of Agricultural Economics at Purdue, explained that like any other market, gas prices are set by supply and demand. There are drivers on both the supply and demand sides which will combine to make the cost of fuel to remain higher than in recent summers.

On the demand side, economic growth is doing well all over the world. Tyner reports that the United States, the European Union, China and Japan are all doing well economically.

“With high economic growth, that means there’s more demand for crude oil and petroleum products,” Tyner said. “More demand means higher price.”

In the case of this summer, there is also a set of supply-side drivers, Tyner said.

OPEC and Russia have combined to agree to reduce crude oil supply on the market. And, gasoline price is primarily driven by the price of crude oil.

“If you take crude oil off the market, as OPEC and Russia have done, that means there’s less supply,” Tyner said. “Less supply means higher prices.”

Tyner reported that crude oil has gone up $20 per barrel. It was $50 per barrel in November, and it’s now $70 per barrel as of early May.

For every $2 that crude oil goes up, gasoline prices raise a nickel.

“So, since it went up $20, that means gasoline goes up 50 cents,” Tyner said. “And, a lot of that increase has been in the last two or three weeks.”

One other important supply-side driver that’s often not mentioned is Venezuela.

Venezuela used to be a very important exporter of crude oil to the United States.

“But there economy has collapsed,” Tyner said. “It’s a disaster state now, and their crude oil exports have plummeted.”

In essence, Venezuela is unintentionally helping OPEC and Russia keep supplies down. Supplies are down far more than they would be if Venezuela was up and exporting its normal supply of crude oil.

Russia is an exporter of crude oil as well, and they want to keep the price higher. Restricting the supply is the easiest way to accomplish that.

“In the past, OPEC had to do it alone,” Tyner said. “But, this time they talked Russia into going in with them, since Russia is also an important exporter. Russia is not a formal member of the (OPEC) cartel, but they agreed to go along and agreed to a quota that was mutually agreed upon.”

One other driver of fuel prices is what Tyner explained as the difference between summer and winter gas.

Summer gas is about a nickel more expensive than winter gas, because of environmental rules.

In the hot weather, there’s a greater tendency for gasoline to evaporate, causing smog and air pollution.

“So, the EPA rules require that summer gas have a less tendency to evaporate,” Tyner said. “They have to take out some of the compounds in gasoline that evaporate easily in warm weather. They store those until winter comes and they put them back in. But, that’s OK because in the winter there’s not that tendency to evaporate like there is in the summer.

“To do that, it costs money,” Tyner continued. “To get that reduction in evaporative emissions, it cost the oil refiners about a nickel a gallon, and of course they pass that on to you and I.

“Those are the main drivers, and it means gas prices this summer are going to be 40 to 50 cents a gallon higher than they were last summer.”

A check of the website Gas Buddy showed the average gasoline price of $2.94 in the City of Wabash on May 8. That was 11 cents more expensive than the state average of $2.83 and 51 cents higher than the state’s lowest prices found of $2.43.

Tyner couldn’t pinpoint a particular reason as to why gas in Wabash is typically higher than surrounding cities and areas.

“I hear that from different places a lot,” Tyner said. “… It basically is how much competition there is in the supply system. And, if you don’t have a lot of competition in your local supply system, that means the market will let them charge a higher price.”

The top seven gas stations in Wabash were all charging $2.94 on May 8.

Posted on 2018 May 15