Gasoline prices in the United States have been declining sharply over the past month, despite high oil prices driven by geopolitical tensions and production cuts. According to AAA, average gasoline prices have dropped from $3.82 per gallon to $3.48 per gallon.
The intriguing aspect of this price drop is that it has occurred while oil prices remain elevated due to the Israel-Hamas war and ongoing production cuts by OPEC. So, what is the primary reason behind this decline in gasoline prices?
The answer lies in the refinery process, where crude oil is converted into gasoline. Refineries have been producing excessive amounts of gasoline, even though its consumption has reduced both domestically and internationally. In fact, some refineries are experiencing losses on gasoline production as the wholesale price fails to compensate for the production costs. However, these refineries continue manufacturing gasoline because they still maintain significant profit margins on other products like diesel and jet fuel. Since most refineries are designed to produce all three products simultaneously, they are unable to avoid producing gasoline.
During BP's recent third-quarter earnings report, interim CEO Murray Auchincloss acknowledged the oversupply of gasoline and diesel. Despite an otherwise disappointing report, BP showcased relatively strong performance in its refining segment.
In summary, falling gasoline prices can be attributed to surplus supply in the refining sector, where refineries continue producing gasoline despite diminishing demand. While other factors like high oil prices persist, the excess supply of gasoline and diesel is driving prices lower.
Gasoline Prices Facing Decline Due to Oversupply
Gasoline prices are expected to continue their downward trend as refineries sell wholesale gasoline for less than $2 a gallon. This drop in price could potentially bring pump prices below $2.50 in certain states. Tom Kloza, global head of energy analysis at OPIS, predicts that retail gasoline will decrease further in the coming weeks, possibly reaching a point of oversupply. However, this decrease may be short-lived if refineries reduce fuel capacity when they restart after seasonal maintenance. Despite the oversupply, the industry remains vulnerable to any unexpected outages, as global refinery capacity has not experienced significant growth in recent years. The situation is challenging to predict, much like the current oil prices.