Gasoline Prices: It's the Fundamentals

Jane Van Ryan
Posted June 16, 2009

Gasoline prices have risen to an average of $2.67 a gallon, the highest price in the past eight months. API's Chief Economist John Felmy and Statistics Manager Ron Planting attribute the price rise largely to what they call "market fundamentals"--the basic law of supply and demand.

Here are the facts:

• Gasoline prices track crude oil prices. Since late April, crude oil prices have risen about 64 cents a gallon, and gasoline prices have climbed 61 cents a gallon.
• This time of the year, motorists must use "summer gas" in their vehicles. It is a gasoline formula that protects air quality by reducing the fuel's ability to evaporate in hot weather. It also is more costly to produce.
• OPEC has reduced its crude oil output by approximately 3 million barrels a day--greater than the decline of crude oil demand during the recession. As "Economics 101" explains, less supply can put upward pressure on prices, assuming that demand continues.
• U.S. gasoline demand has risen slightly, but demand for other fuels such as diesel, is down sharply. Refiners are producing near-record amounts of gasoline in order to meet demand.
• Refiners are working at 84 percent capacity. This figure is lower than last year at this time, but nearly 20 percentage points higher than manufacturing as a whole, which operates at 65 percent capacity.

Today's gasoline prices have triggered concerns over inflation, and some observers have questioned whether higher fuel prices could prolong the recession. John Felmy says inflationary fears reinforce the need for a sound national energy policy that includes increasing the supply of U.S. crude oil and natural gas.

Policies that encourage the production of more domestic oil and natural gas are critically important to America's economic and energy security. Visit the Action Center and show your support for increasing access to America's own energy resources.