7 Key Things To Know About Oil and Gasoline

7 Key Things To Know About Oil and Gasoline


Signage is displayed on fuel pumps at a Phillips 66 gas in Princeton, Illinois, U.S., on Tuesday, July 24, 2018.  Photographer: Daniel Acker/Bloomberg© 2018 Bloomberg Finance LP

During the course of a radio appearance I made on January 29 (BYU Radio’s “Top of Mind” program hosted by Julie Rose) I was reminded of just how little most Americans really understand about oil and gas in general, and how the gasoline or diesel they use in their cars is manufactured and delivered to their local gas stations.

That’s not a criticism of ordinary Americans, because 98% of them have no real need to understand such things in the course of their lives, and our system of education does almost nothing to educate them about this particular topic. Nor is it a criticism of Ms. Rose, who herself is extremely knowledgeable, but poses questions she knows most of her listeners are wondering about.

Given all of that, I have endeavored here to put together seven key things to know about oil and gasoline that might help the average person better understand this key element in their daily lives:

  1. Where does Gasoline come from? – Gasoline is one of many products derived from crude oil at oil refineries. One good way to think of crude oil is as a complex soup with all kinds of ingredients floating around in it. The refining process basically takes the crude oil soup that comes up out of the ground through oil wells and separates all those ingredients out of it. Gasoline is like the noodles in your chicken vegetable soup.
  2. Why does the price for gasoline fluctuate so much? – The first thing to understand here is that the price for gasoline is mainly determined by the price of the crude oil that is used to produce it. Crude oil is a global commodity, and its price is determined on a global basis, depending on basic supply and demand principles. There are other factors that play a role, but in general, as the price for oil goes up, so will the price for gas at the pump. As the crude price goes down, the gasoline price will follow.
  3. But why then do gasoline prices vary so wildly from state to state? – This is a great question. As we see today, customers in places like Texas and Utah are filling up for less than $2.00 per gallon, while consumers in California, New York and other places are paying as much as $5.00 per gallon. One reason for that is taxes – some states tax gasoline at much higher rates than others. Another reason is environmental policies like those in California, where policymakers are intentionally driving up the price of gasoline and diesel in order to encourage more rapid conversion to electric vehicles. These are choices made by elected officials, presumably endorsed by those who vote for them.
  4. Are gasoline prices always lower in the winter than they are in the summer? – No, not really. In general, weather plays little role in the determination of prices at the pump , other than when severe weather events, like hurricanes or our current polar vortex cause disruptions in transportation systems. This could cause spot shortages that might result in temporarily higher prices, like we saw in Texas in the wake of Hurricane Harvey in 2017. That having been said, there is one seasonal factor that does generally result in slightly higher prices in the spring, which is when refineries are required by the EPA to start producing “summer blend” fuels as a part of the longstanding and pretty successful EPA effort to reduce regional haze issues. For a variety of reasons, it is more expensive to produce summer blends than  it is to produce winter blends, and those higher costs get passed along to the consumer.
  5. Will the new sanctions on Venezuela and its national oil company, PdVSA, result in higher gasoline prices in the U.S.? – Another very good question. The answer is probably, but not by much. Venezuela has been a fairly significant exporter to the U.S. but its volumes have steadily fallen in recent years as its economy has collapsed . U.S. refiners will have to find another source of crude to replace the lost Venezuelan volumes, and to the extent they must pay higher prices to obtain that feedstock, the higher costs will be passed through to the consumer.
  6. Why are we exporting so much of our own crude oil? – That’s because most of our refining capacity in the U.S. – particularly along the Texas and Louisiana Gulf Coast – was designed to process the “heavy” grades of crude oil that come from places like Venezuela, Canada, Mexico and other overseas providers. Most of production coming out of our country’s shale formations is what we call “light, sweet” crude, and we have less domestic refining capacity for that grade of crude.  So, much of that production has to be exported in order to be refined. Refiners are working to build more light, sweet refining capacity, and most expansions in recent years – like the big one announced this week by ExxonMobil – are designed to re-balance that situation.
  7. Will the U.S. ever become fully energy self-sufficent where crude oil is concerned? – Probably not, at least not anytime in the coming several decades. The reality is that, despite the growing intervention into the auto market by electric vehicles, the demand for gasoline and crude oil in the U.S. continues to rise, and is projected to keep doing so into the future. We are far more energy “secure” today than a decade ago thanks to the Shale Revolution, but becoming fully self-sufficient is another matter entirely.

So there you are: Answers to seven basic questions about our current situation with crude oil and its major by-product, gasoline. Now you can commit them to memory and bore your guests to tears by repeating them at your next dinner party.





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