Excerpted from This Week in Petroleum, Sept. 1, 2021
On August 30, 2021, the Monday before the Labor Day weekend, the regular gasoline retail price averaged $3.14 per gallon (gal) across the United States, an increase of 92 cents/gal (41%) from the same time in 2020 (Figure 1). In 2020, the average retail gasoline price on the Monday before Labor Day was at its lowest level for that time of year since 2004 because of substantially reduced vehicle travel and other responses to COVID-19, which significantly reduced gasoline demand, as well as lower crude oil prices. So far in 2021, the growing number of individuals that have received COVID-19 vaccinations in the United States and the lifting of travel restrictions have contributed to rising gasoline demand throughout much of the year, leading to pre-Labor Day gasoline prices at their highest levels since 2014. The high prices reflect more demand for gasoline, lower gasoline inventories, and higher crude oil prices leading up to the late-summer holiday weekend. Additional supply constraints brought on by refinery outages, crude oil production shut-ins, and power outages in Louisiana and along the U.S. Gulf Coast (brought on by Hurricane Ida on August 28 and 29) do not appear to have contributed to higher prices going into the Labor Day weekend, though may still contribute to higher prices in the weeks that follow.
After the onset of the COVID-19 pandemic in March 2020, U.S. retail gasoline prices fell toward and eventually below $2.00/gal, and they remained below $2.50/gal through the end of 2020. As COVID-19 vaccinations in the United States became more widely available in early 2021 and mobility increased, rising gasoline demand contributed to rapidly increasing gasoline prices. U.S. average regular gasoline retail prices increased to above $3.00/gal beginning in May 2021. The particularly rapid pace of the increase in February and March was partially underpinned by cold weather outages at several oil refineries in Texas during that time, contributing to a substantial drawdown in U.S. gasoline inventories, which remained below the five-year (2016–2020) average leading up to the Memorial Day holiday weekend. Rising imports and increasing refinery production partially offset low inventories in the second quarter, reaching a summer high of almost 243 million barrels on June 11. However, in late June through early August, inventories decreased to below the five-year range, where they have remained leading up to this year’s Labor Day weekend (Figure 2).
The lower inventories are most noteworthy on the U.S. East Coast, or Petroleum Administration for Defense District (PADD) 1, the largest gasoline demand market in the United States. East Coast gasoline inventories were nearly than 7 million barrels (10%) below the five-year average, as of August 28. Gasoline inventories in the Rocky Mountains (PADD 4) also decreased to levels well below the five-year range over the course of the summer and remain below the five-year average going into Labor Day. The East Coast, Rocky Mountains, and West Coast (PADD 5) regions have relatively less refinery capacity in 2021 compared with their pre-COVID levels because of reductions in refinery capacity in 2020, contributing to lower gasoline production.
In addition to low inventories, rising crude oil costs have been another major driver of higher gasoline prices this year. Global demand for crude oil has increased faster than crude oil production, leading to global petroleum inventory drawdowns and higher global crude oil prices in August 2021 compared with the same time in 2020. On August 31, 2021, the Brent crude oil spot price was $71.24 per barrel (b), $26.85/b (60%) higher than at the same time last year.
Before the COVID-19 pandemic, crude oil typically accounted for more than 50% of the total retail price of gasoline, as it did through most of 2019. However, reduced gasoline demand and low crude oil prices contributed to crude oil’s decreasing share of the gasoline pump price after the onset of the COVID-19 pandemic and through the summer and early fall of 2020 (Figure 3). According to our Gasoline and Diesel Fuel Update as of July 2021, the price of crude oil accounted for nearly 55% of the overall gasoline retail price, compared with only a 25% share in April 2020. Refining costs, which account for the difference between refiners’ crude oil acquisition and wholesale gasoline prices, accounted for the second-largest share of the overall price at 17% of the retail price. Taxes, which vary by state and municipality, accounted for an average of 16% of retail gasoline prices in July. Distribution and marketing costs, which reflect the remaining difference between the wholesale and retail gasoline price, including terminal-to-station transportation costs and any retailer margin included in the pump price, accounted for 13% on average.
Although higher crude oil costs account for the largest share of the annual price increase in July 2021 (the most recent month in the Gasoline and Diesel Fuel Update), the share of the pump price attributable to refining is also higher this year. The increased refining share is about 6 percentage points higher than July 2020, but it is only 1 percentage point higher than its share in July 2019. The higher share compared to 2020 reflects the gradual shift out of pandemic conditions for refiners as gasoline demand increases and utilization rates rise. The higher refiner share may also account for higher prices for Renewable Identification Numbers, which refiners must either acquire through blending biofuels or by purchase on secondary markets to comply with the U.S. federal Renewable Fuels Standard.
Higher gasoline prices driven by low gasoline inventories going into the Labor Day weekend are likely to increase further because of refinery outages along the U.S. Gulf Coast as a result of Hurricane Ida. Phillips 66 and Shell each announced refinery closures at affected facilities, which have also been reported at two Valero facilities, and ExxonMobil has announced reduced operations at its Baton Rouge refinery. The Colonial Pipeline, the primary mechanism for moving fuel from the Gulf Coast to the East Coast, also reported temporary, precautionary shutdowns along segments affected by the hurricane, though has already reportedly resumed service. The hurricane also affected offshore crude oil production, and reduced offshore production may contribute to increases in crude oil prices in the short term. Reduced refinery production in the Gulf Coast, the primary source of gasoline and other petroleum products for itself and the East Coast, may result in constrained supply and contribute to higher wholesale and retail gasoline prices in subsequent weeks, though as of August 30, regional inventories appear capable of meeting existing demand without contributing to price increases for the Labor Day weekend.
U.S. gasoline prices vary regionally, reflecting local supply and demand conditions, different fuel specifications required by state laws, and taxes (Figure 4). Regional gasoline prices are usually the highest on the West Coast due to the region’s limited interconnections with other major refining centers (including the Gulf Coast), tight local supply and demand conditions, and requirements for gasoline specifications that are more costly to manufacture. West Coast prices as of August 30 were $3.94/gal, an increase of $1.08/gal (38%) over the same time last year. The Rocky Mountains region faces similar logistical constraints as the West Coast, and particularly low inventories this year have contributed to gasoline retail prices averaging $3.65/gal, an increase of $1.30/gal (56%) over 2020. The year-on-year increase for the Rocky Mountains is the largest of the five U.S. regions in both dollar and percentage terms.
The Gulf Coast accounted for 54% of the country’s total refining capacity as of January 2021, and it produces more gasoline than it consumes. As a result, the price of gasoline in the Gulf Coast is often the lowest in the United States. As of August 30, the average retail gasoline price for the Gulf Coast was $2.77/gal, an increase of 89 cents (47%) compared with the same time last year.
On the East Coast, the largest gasoline demand market of the five regions, retail gasoline prices were $3.02/gal on August 30, an increase of 86 cents (40%) compared with 2020. Midwest (PADD 2) prices increased 88 cents (42%) compared with 2020, at $3.00/gal this year. The Midwest and East Coast prices were the closest to the U.S. average price.