Despite low demand, gas prices are inching upward again

It may be the off season for driving, but refinery shutdowns have been causing reduced supply, energy expert says.

By Alexandra HartJanuary 23, 2023 2:05 pm, ,

Not long ago, 2023 kicked off with one of the biggest weekly energy price dips in years. Now, prices at the pumps are telling a different story.

Consumer gasoline prices have spiked, even though we’re in the middle of winter when demand is typically lowest. AAA reports that the national average gas price is $3.42 per gallon – here in Texas it’s at $3.04.

Matt Smith, lead oil analyst for the Americas at Kpler, spoke with the Standard about the factors influencing gas prices. Listen to the story above or read the transcript below.

This transcript has been edited lightly for clarity:

So gasoline prices on the national average got down close to $3 a gallon in December, but they’re on the rise once again. Texas prices seemed to be around the $2.70-something mark. And now I’ve been seeing them at the pump regularly closer to that $3 level. What’s happening?

Matt Smith: Yeah, bad news. So the Texas average is back above $3 a gallon, up $0.40 in the last month. So there’s a number of factors at play here. So we had the winter storm at the end of last year, the so-called bomb cyclone. You know, it disrupted a huge chunk of refining capacity across the U.S. And, essentially, refineries aren’t equipped to deal with the lower temperatures so they kind of took the brunt of the impact there. But to your point, there is a seasonality to gasoline prices. There’s low demand right now, but then they tend to rise through the spring as refineries go through maintenance, as we switch from the winter blend to the summer blend – which is more expensive because it has more additives in it to deal with higher temperatures. So higher temperatures potentially await here.

Yeah, but it ain’t spring and already we’re seeing these these spikes at the pump. I mean, is it that the refiners are trying to ramp up in anticipation of spring? Is part of this the fact that we’re now returning to, generally speaking, pre-pandemic levels of driving? How do you figure that? 

So the loss of that refining capacity, albeit for a temporary period, caused the exchange-traded price for gasoline to rally much stronger. And so it’s been up over 20% in the last couple of weeks. But on the demand side, interestingly, demand is weaker. So government weekly data pegs demand down over 4 ½ percent year-on-year on a four week moving average, while the monthly data – which is more accurate but more LACT – shows demand through the first ten months of last year on par with the year prior. So 2021, which is kind of still in the pandemic, but down 550,000 barrels a day versus pre-pandemic levels, which is about 6%.

Now, this is likely due to a combination of factors: people working from home, buying more on the Internet, improved fuel efficiency of new vehicles… But most key: the penetration of electric vehicles. So electric vehicles accounted for 5.8% of all new car sales in the U.S. last year – an increase from 3.1% the year prior. So it appears we have passed the peak of gasoline demand in the U.S.

I’m curious about something. Last year President Biden tapped the Strategic Petroleum Reserve to try to push oil prices down and seemed to have some effect, depending on how you read it. With prices going back up again, do you think the president’s going to be tapping the SPR? 

No. You know, those strategic reserves were drawn down so much last year. We started at close to 600 million barrels in them, and we ended the year down by more than 200 million. So that just can’t happen again because we need to retain reserves to cover any unforeseen supply shocks, which is the point of the reserves in the first place. So a lack of ability to tap those reserves means that U.S. commercial crude inventories will likely be drawn down significantly this year, which unfortunately could lead to supporting oil prices and hence gasoline prices supported also.

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