Why did gasoline prices spike in Michigan?

Jun 15, 2011

Everybody’s got a theory why gasoline prices shot up.

“I think gas prices are up because we’re getting our gas from the wrong place.  We need to get gas from Alaska.”

“I think gas prices are up because it’s summertime and everybody wants to travel and it’s a conspiracy.”

 “Government regulators are not willing to rein in Wall Street.  If you can speculate on a commodity and you have a hedge fund that’s big enough, you can affect prices and earn profits.”

That’s Ken Brown, Sue Conklin and Eric Bradley.

You’ll hear talk like that and other theories just about anywhere people start talking about the price we pay at the pump. 

So… let’s look at it, starting where we get oil.  The U.S. Energy Information Administration reports we imported 51% of the petroleum we used in 2009.  It’s been higher.  It’s been lower.  The government agency predicts we’ll become less dependent on foreign oil in the future. 

If we tapped all the domestic reserves we have, such as Alaska, it really wouldn’t have much of an impact on gas prices here.  Oil is a global commodity.  So, pulling it from the U.S. sources wouldn’t add that much to the global pool.  Net result at the pump:  not much. 

We have plenty of oil right now. 

The global economy is warming up and the demand for oil has increased.  So has the price has edged up since it bottomed- out during the recession.  But, if you remember, in July 2008 the price for a barrel of oil soared past $145.  We’re at about $100 a barrel right now. 

And yet, gasoline prices in Michigan went higher than they did in 2008.

Patrick DeHaan is a petroleum analyst with Gas Buddy.com.   He says oil and gasoline are not the same thing.

“Crude oil inventories and gasoline inventories are different.  And the situation here that we have is there’s simply not enough gasoline and so prices of gasoline are higher because there’s lower supply available.”

So, if there’s a shortage of gasoline, why doesn’t President Obama open up the Strategic Petroleum Reserves.  Well, because those reserves are not gasoline-- they’re oil.

“It wouldn’t help a whole lot.  Oil prices have stayed around a hundred dollars (per barrel).  Even with OPEC saying they’re not going to pump more, crude oil prices only went up a dollar or two a barrel.  Why?  Because we have plenty of it.”

And now Saudi Arabia says it’s increasing production.  So, oil prices have fallen a little bit more.

 It must be the Wall Street speculators, then.  Not this time. 

Investor speculation has caused spikes in the past… such as during the Iranian crisis during 1979… or when Iraq invaded Kuwait in 1990. 

Patrick DeHaan at Gas Buddy.com says speculators are always making predictions about where oil and gasoline prices are going.

“These hedge funds and these banking companies that are heavily invested in oil push the fear button with saying prices are going up and up.  And more and more people invest in oil and gasoline and then the big companies pull out their money after making a good profit and prices, you know, they may tumble.  And then they get back in.  They let prices go up.  They get back out.  It’s just a game.”

But all that getting in and out of the market, that up and down of prices has not had an real affect on oil and gasoline costs during the last several years. 

Lutz Kilian is an economist at the University of Michigan.  He’s taken a close look at prices in recent years.  Over time speculation hasn’t been an issue.

“There is no evidence, certainly not up to the end of last year, that speculation played any important role in driving up the price of crude oil.”

Sure, speculation causes some fluctuations, but those pressures have forced the prices down as often as they’ve forced the prices up.  So it evens out over time… at least in recent years.

So, that doesn’t explain why gasoline prices hit records this year. 

Why were we short of gasoline?

Here’s what happened.

First, refineries have to switch from making winter gasoline to summer gasoline.  It’s required by the government because of higher smog levels during the summer.  The summer grade of gasoline is cleaner.  But every city with a smog pollution problem has to have a different blend of gasoline.  And that means refineries have to make different fuels .  Re-tooling these refineries is complex and often there are problems… right when we start buying more gasoline for summer trips.

“The timing is always suspect.”

Again, Patrick DeHaan with Gas Buddy.com.

“We’re in driving season where the market is very sensitive.  Oil companies know if they have a problem, prices shoot up.  But, at the same time, we have to realize that there’s this transition from winter to summer gas and it’s not like just turning a light switch.  Refineries have to retool their plants; they have to restart them.  Everything has to change.  They have to drain their tanks; they have to fill the with summer-spec gas.  It has to make its way through the pipeline.  And inherently, when you’re doing this massive switchover, there are going to be some kinks.”

And for the refineries that supply the Midwest, there were a few kinks this spring.  Storms sweeping through southern Illinois knocked out power to a Marathon refinery in Robinson, Illinois.  A Citgo refinery in Lemont, Illinois near Chicago has had a boiler problem.  An Exxon-Mobil refinery in Joliet, Illinois has had what’s described as “flaring” problems, reducing production.

So, there have been shortages of gasoline for the Midwest.  That’s driven up prices, not just for Marathon, Citgo and Mobil, but gasoline throughout the region.

Tim Hess is with the U.S. Energy Information Adminsitration

“You have a situation where one producer goes down, that takes away from the whole pool of gasoline that’s available in a market.”

That’s because those refineries have to supply gasoline to their service stations.  So, they buy gasoline from other refiners on the wholesale market.  Your favorite gas station just might be selling the same brand of gas as the station across the street.

“If refinery “A” is down, they’re going to have to buy gasoline on the wholesale market.  And because there’s less gasoline available because of the fact that they are down, then that is going to drive the price of gasoline up in the entire market.”

And that drives a wedge between the price of crude and the price of gasoline.  The difference between the price of crude oil and the wholesale gasoline price is called the gasoline crack spread.  And the gasoline crack spread this spring saw record increases, especially in the Midwest.  And oil companies whose refineries were up and running strong made a ton of money.

The economist at the University of Michigan, Lutz Kilian says as these refineries get back up and running, that wedge that opened up the gasoline crack spread will have less of an impact.

“Usually, these wedges are very short term.  In the long run, the prices run together, but one has to keep in mind this additional element.”

So gasoline prices in Michigan should continue to go down for a while. 

Unless another oil producing country becomes embroiled in domestic turmoil and oil prices go up… or unexpected demand in China causes crude prices to spike… or a hurricane hits the Gulf of Mexico knocking offshore oil wells out of commission… or another Midwest refinery goes down.  

Yeah… there’s a lot that can cost you at the pump.