Why Gas Prices Will Continue to Climb

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The average price of gas in the United States is still below the 2012 average of $3.63 for a gallon of regular, but that won't be true for long.

Gas prices have risen every day for three weeks, and motorists are starting to wonder when the surge will end.

Nationwide, the average price for a gallon of regular gas is up 26.3 cents, or about 8%, this year to $3.55, the highest level since the end of October.

And the 17.4-cent spike in the average price of gas between Jan. 28 and Feb. 4 was the largest weekly increase in almost two years.

Unfortunately, it's unlikely gas prices will drop anytime soon.

Here's why.

Not Just Higher Oil Prices to Blame

This year's sharp increase in the price of a gallon of gas has two primary causes.

First is the move in oil prices.

West Texas Intermediate crude is up 5% this year, and Brent crude is up more than 6%.

That translates to higher gas prices for drivers, as oil prices account for 68% of the cost of a gallon of gas, according to the Energy Information Administration.

And Money Morning Global Energy Strategist Dr. Kent Moors sees oil prices continuing to increase because of supply-and-demand issues.

He expects global energy demand to be spurred by the continued growth of China's middle class, improved optimism in the Eurozone and a resolution of America's fiscal crises.

Moors cites the increasing costs to produce a gallon of oil and government instability in many oil-producing nations as two supply-side reasons oil will move higher.

The other factor driving gas prices higher is the temporary shutdown of refineries.

Refineries are in their annual process of briefly shutting down to prepare for summer and perform maintenance, which limits the supply of gasoline.

Refineries shut down during winter to make the transition to the summer-blend gasoline, which must be formulated differently to reduce smog buildup during the warmer weather.

And the shutdown is far from over.

"The peak maintenance [for refineries] is probably weeks away," Tom Kloza, chief oil analyst at the Oil Price Information Service, told MarketWatch. "The market will almost certainly see an uptrend in prices prevail into March and perhaps into April."

And some refineries have made unanticipated shutdowns or closings, reducing refining capacity.
Hess Corp. (NYSE: HES) said last month it would close its Port Reading, NJ refinery, its last refinery, by the end of February.

Where's All the Money Going from High Gas Prices?

A study done by the Union of Concerned Scientists found that over the average lifespan of a vehicle, 15 years, drivers will spend more than $20,000 on gas.

Guess who gets the biggest slice of that pie: that's right, oil companies.

They rake in 66% of what drivers spend on gas, or roughly $33 on a $50 fill-up.

Gas stations make only 81 cents from a $50 fill-up.

Taxes account for $7; refining, $4.87; and distribution and marketing, $4.08.

>>Get more Money Morning coverage on oil and gas prices.

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  1. H. Craig Bradley | February 8, 2013

    HOW OIL COMPANIES "FIXED" THEIR PROBLEM

    Hess also closed their only refinery in St. Croix, U.S. Virgin Islands last Winter, laying-off 2,000 well paid workers and contractors. ( This refinery helped supply the East Coast). Incidentially, Shell Oil closed one of their newest and most productive refineries on the West Coast in Bakersfield, CA about 10 years ago.

    The problem is both refineries were considered unprofitable given the cost of gasoline and meeting government (EPA) pollution mandates. Oil companies in California decided together in the mid-nineties there was simply an excess of refinery capacity for them to make a "decent profit".

    So, ALL the oil companies "fixed the problem" by closing down domestic (U.S.) Refineries). The Federal government's environmental regulations exasperated the problem, so the big oil companies simply "kicked the can down the road" for consumers to foot the bill. Problem solved.

  2. peter stafford | February 9, 2013

    GAS

    In Ontario Canada, just outside Ottawa today, premium gas was 5.58 for a US Gallon.
    That costs about 130 dollars to fill my Ford pickup if it was empty.And that will only take you about 325 miles on a good day

  3. Terry Steward | February 9, 2013

    It is nothing more then old fashion greed, as old as Cain and Able. Just very sad, sad.

  4. Lee Cary | February 10, 2013

    This piece states that "They [referring to oil companys] rake in 66% of what drivers spend on gas, or roughly $33 on a $50 fill-up." (Nice use of "rake".) Some readers will take that to mean a 66% profit. Why didn't the author tell us what the profit margin is for oil companies by extracting production costs – substantial in the oil business, BTW? Money Morning can't be an unbiased source of economic information by misleading statements.

  5. Unicorn1941 | February 11, 2013

    Folks – that is exactly what the Obama administration wants-high gasoline prices.
    They need this as an incentive for their green energy agenda.

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