By: Devon Valinsky
If you are someone who drives frequently, you are likely aware of the sharp increase in gas prices over the last few months. You may also be aware of much of the political posturing and theories on why these prices have been on the rise. The U.S. Energy Information Administration (EIA) is a government agency whose job is to gather and distribute data and other information relating to the energy industry.[1] One of the many data points that the EIA tracks are the average price per gallon of gasoline across the country, as well as by region. According to the EIA, the average price per gallon was $2.420 in January, $2.587 in February, and $2.898 in March.[2] In the two-month span from January to March, the average price per gallon rose roughly 19.6%.[3] Although this is a drastic increase, part of this increase must be attributed to a yearly trend. Over the five-year period from 2015-2019 (excluding 2020 as an outlier because of the COVID-19 pandemic), the average price increase per gallon from January to March was around 5.3%.[4]
In order to better understand why gas prices may have risen more than they normally do in the first quarter of the year, we must first take a look at the major factors that affect gas prices. According to the EIA, 56% of the price of gas consists of crude oil costs.[5] Further 13% is attributed to refining costs, 12% to distribution and marketing, and 19% is attributed to taxes. As you can see, the cost of the crude oil used in producing gasoline makes up over half of the cost per gallon. Although much of the coverage regarding the increase in prices has been given to gasoline, it is worth noting that the price of crude oil has also increased drastically over the last few months. Two of the major benchmarks of oil prices are those of West Texas Intermediate (WTI) crude oil and Brent crude oil. In the time period from November 2020 through February 2021, the price of WTI crude oil and Brent crude oil rose 44.2% and 45.9% respectively.[6] On top of this sharp increase in the price of crude oil, the recent winter storms to hit the southern United States have also played a role in the increase in gas prices. The weekly production of fuel ethanol, one of the inputs used in making the gasoline we use in our cars, saw a drop of over one-third in the last week of February compared to the production level at the same time last year.[7]
The combination of the sharp rise in oil prices and the decrease in production of fuel ethanol are both anomalies that could not be predicted based upon past trends. When you consider these factors and how much the price of gasoline depends upon them, one can see why the price of gasoline has risen nearly 4 times more than it has in the same period (January-March) for the five-year period from 2015-2019. So, when you hear politicians and political pundits taking shots across the bow regarding the recent spike in gas prices, just remember that factors largely out of direct control of the government determine the price we pay at the pump.
[1] U.S. Energy Info. Admin., https://www.eia.gov/about/
[2] U.S. All Grades All Formulations Retail Gasoline Prices, U.S. Energy Info. Admin. (Mar. 29, 2021), https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=emm_epm0_pte_nus_dpg&f=m
[3] Id.
[4] Id.
[5] Gasoline and Diesel Fuel Update, U.S. Energy Info. Admin. (Mar. 29, 2021), https://www.eia.gov/petroleum/gasdiesel/
[6] Spot Prices, U.S. Energy Info. Admin. (Mar. 31, 2021), https://www.eia.gov/dnav/pet/pet_pri_spt_s1_m.htm
[7] Sean Hill & Estella Shi, Extreme winter weather event in Texas reduced fuel ethanol production in February, U.S. Energy Info. Admin. (Mar 31, 2021), https://www.eia.gov/todayinenergy/detail.php?id=47356