![]() The sluggish recovery in refined product supply has been magnified over the last year by a surge in demand as the U.S. This means there's little, if any, scope to boost production of gasoline or even other refined petroleum products such as propane or jet-fuel. Estimates from the Energy Information Administration (EIA) suggest plants are at about 95% capacity. To make matters worse, the refineries that are currently operational are already running near full capacity. ![]() The investment required to either build new refineries or bring back idled plants is so costly, it simply doesn't make economic sense for companies to make those investments. America is undergoing an energy transition from fossil fuels to renewables. Unfortunately, the outlook for petroleum refining is unlikely to improve. Moreover, there are multiple other refineries currently sitting idle (accounting for 1% or 125,000 bpd of gasoline production), having never reopened since shutting down during the early stages of the pandemic. At the same time, several other plants have been temporarily shut down due to hurricane damage and/or retooling for conversions to produce more renewable fuels. Estimates suggests that these closures alone have shaved about 5% or 1 million barrels per-day (Mbpd) from U.S. refining capacity has struggled to get back to pre-pandemic levels because several major refineries have since closed permanently (Chart 2). However, there are other factors that will likely keep fuel prices higher than what the historic WTI-gasoline elasticity may otherwise suggest – at least over the near-term. Undoubtedly, we are seeing some of those market dynamics currently playing out. In fact, it is not until customers engage in the timely and costly search of finding those stations that offer the lowest possible price that competitive market pricing is eventually restored. On the flipside, when wholesale prices fall, each station can boost its margin by passing on the cost reductions more slowly. When input prices rise, retail gasoline operators' incentives are aligned to raise prices accordingly to preserve margins. The main reason for the disconnect stems from market pricing power. In fact, the asymmetric pricing in fuel prices has become so apparent in recent decades that economists have coined the phenomenon as "rockets & feathers". Gasoline prices have always been quick to move higher when oil jumps, but far slower to follow oil on the way back down. However, history tells us that this recent "dichotomy" isn't atypical. The fact that prices have come down more slowly, and by less than oil has been a point of frustration for many. Gasoline prices are one of the few things that are posted on large signs in clear view, so consumers are constantly reminded of the rising price pressures they're facing on a daily basis. ![]() It's only in the last few weeks that consumers started to see some reprieve, with the AAA regular gasoline price measure down about 17%. However, more recently oil has turned sharply lower – falling by over 25% – while prices at the pump have been slower to come down. At their peak, prices had risen over 50% alongside the sharp spike in oil prices following the onset of the Russia-Ukraine war (Chart 1). Gasoline prices have been grabbing headlines over the last several months, and rightfully so.
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