The tenth anniversary of Hurricane Katrina is coming up at the end of this month, truly one of the worst natural disasters in U.S. history. It was also 10 years ago that gasoline prices skyrocketed and have yet to really fall back to earth.
Katrina caused extensive damage to Gulf of Mexico drilling rigs and refineries along the Louisiana and Texas coasts, interrupting the supply of refined fuel products. It was precisely at that point that prices of petroleum products began to be influenced more by the future markets than by oil producers.
For example, the price of oil in 2004 was $37.66 a barrel, about the price it is today in inflation-adjusted dollars. In 2006, the price of a barrel of oil averaged $58.30 and kept going up until it peaked in 2008 at over $90 a barrel.
Gas was $1.85 in 2004
What happened to the price of gasoline was even more dramatic. In 2004, the average price of gasoline was $1.85 a gallon. In 2006, after Hurricane Katrina, the average was $2.57 a gallon.
Brian, a reader from Utah, reminded us of this recently and asked why gasoline prices, which seem low at a national average price of $2.65, aren't even lower. Since a barrel of oil is now selling for roughly what it did in 2004 – before Hurricane Katrina sent it soaring – why isn't gasoline priced at around $1.85 a gallon, the way it was then?
It's a good question with an interesting answer. It starts with the business assumption that prices should always go up and rarely come down. When prices rise businesses expand, building more infrastructure and hiring more employees. When prices go down, their profit margins are squeezed.
Role of refineries
If cars ran on unrefined crude oil, then you could make a strong case that fuel prices should be completely based on the price of oil. But crude oil has to go through refineries to be turned into gasoline. These refineries then have to distribute gasoline to stations around the country.
One reason oil prices are so low is that there is a supply glut. Producers are pumping so much they are running out of places to store it. Refineries can only handle so much, so they can become something of a bottleneck. When a refinery reduces output for maintenance, or because of a breakdown or accident, it reduces supply and drives up the price. This seems to happen a lot more now than it did in the past.
On the other hand, demand for gasoline continues to grow, but the U.S. isn't expanding its refinery capacity as fast as demand is rising. That said, refineries have plenty of gasoline.
Supply and demand
Refineries are able to keep a certain balance between domestic supply and demand of gasoline by increasing exports of the fuel – which they have been doing for some time.
Check out this data from the Energy Information Administration. It shows U.S. gasoline exports surged in late 2010 and have steadily increased ever since.
In January 2010 the U.S. exported 6.8 million barrels of gasoline. By January 2011 it had doubled. In January 2015 the U.S. exported 16 million barrels of finished motor gasoline.
Why isn't there a national energy policy that would ensure plentiful supplies of gasoline and avoid abrupt price swings? It would be great for consumers, but, frankly, neither of the two political parties seem interested.
Republicans are ideologically inclined not to interfere with markets. Democrats don't like fossil fuels and are not particularly interested in making them less expensive and more attractive.
So to answer Brian's question, when it comes to gasoline prices, what goes up may come down, just not all the way.