Why Gas Is So Expensive This August

Americas are paying high prices at the pump ahead of the Labor Day holiday due to rising crude oil prices and limited refinery capacity. However, relief is likely on the way.

On Thursday, the national average price paid for a gallon of gasoline is about $3.87, according to price data published by AAA. The lowest prices were found in Mississippi, where the price is about $3.33. The highest was in California, where drivers pay about $5.18.

Diesel prices, which are critical for the transportation of goods around the U.S. and the world, remain elevated as well. On Monday, The U.S. Energy Information Administration pegged the average price at $4.37 a gallon.

Gas prices are significantly lower than the record $5.01 a gallon national average Americans paid in the middle of June 2022.

Energy price observers agreed there are two main culprits for currently elevated prices: OPEC's decision to cut back crude oil production and soaring temperatures in the Gulf Coast states where the majority of oil refineries are located.

In an interview with International Business Times, Tom Kloza, global head of energy analysis at the Oil Price Information Service, said higher crude oil prices are the main cause of the issue. Since June 27, the price of West Texas Intermediate crude oil increased to about $80 a barrel from about $67.37 a barrel. Most of that price increase, Kloza said, is tied to the production cuts implemented by OPEC+ led by Saudi Arabia's decision to dial back its production.

In an interview, Jeff Barron, a senior market analyst with the EIA, said the role of OPEC is to behave like a central bank that moderates the global price of oil. The cartel aims to keep the supply of oil in line with the demand. OPEC nations like Saudi Arabia are so-called swing producers serving as the oil producer of last resort.

Barron said the price of crude oil accounts for about 50% of the price Americans pay at the pump. It's not the only factor, however, as refining cost account for a quarter of the price.

In an interview, Andrew Gross, a spokesman for AAA Gas Prices, said the heat is an extreme challenge for oil refineries. As temperatures soar, the inherent dangers of working with volatile chemicals in refineries are exacerbated and the facilities cannot produce as much gasoline as normal. This constrains the gasoline supply and causes prices to increase.

Furthermore, Barron said, more gasoline-producing refineries closed during the pandemic due to extremely weakened demand or converted into producing another petroleum product. While most of the economy moved on from the pandemic, demand for gas is actually still down from 2019 levels because more workers are staying home than ever before. Less refinery capacity keeps the supply of gasoline lower.

All three agreed oil refineries are facing a serious risk at the end of the summer and beginning of the fall as hurricane season peaks in the Atlantic.

Kloza called the threat of interruption of oil refineries in the Gulf of Mexico an "extreme wildcard" for gasoline supplies and prices. Even without a direct hit, Gross told IBT, oil refineries can still be impacted by power losses or damage to offshore facilities that supply crude oil.

Barron said distribution and marketing costs, along with local and federal taxes, account for the final quarter of the gasoline price equation. Gross said each individual service station decides the price it will charge for gasoline, which accounts for stations in different parts of town sometimes charging radically disparate prices.

Kloza said gas stations and convenience stores pay a price for the gasoline they sell then they add a premium to generate a profit and pay their workers.

In the past, employees at these businesses were making minimum wage but now these workers are earning more. The price premium is as high as 40 cents a gallon to support elevated wages and more welcoming convenience stores, Kloza said.

Gross said the price of gasoline and diesel even plays into the price consumers pay at the pump. Americas living closer to the oil refineries in the Gulf states, Oklahoma and Kansas pay less while those living on the West Coast pay more due to the cost of transporting the fuel to their pumps.

Moving ahead, due to this phenomenon, Kloza predicted Americans living in the Central and Eastern states will see their gas prices fall while those living in the western half of the country will see prices rise. A rare hurricane headed for the California coast — Hurricane Hilary — will create more supply problems in the Southwest and keep the supply of gas tight.

The effects of elevated gas prices are unclear for the U.S. economy. Mostly, the analysts agreed, the higher cost of fuel directly translates to higher freight prices, which means elevated prices for nearly all goods.

In the past, Barron said, there used to be a nearly direct correlation between high gas prices and a recession in the U.S. That's changed since the shale oil revolution began this century and its harder to say what the link is between the price at the pump and the economy.

Kloza told IBT gas prices are a serious issue for many Americans because they feel they are being taken advantage of and that their politicians are failing them. This is illogical, he said, since politicians have little to do with the price of gasoline.

Kloza said he was far more worried about the price of diesel going forward and how that could drive inflation of goods even as the Federal Reserve continues along its mission to achieve a so-called soft landing.

Kloza said global demand for gasoline is peaking in August 2023 as the U.S. and Europe continue to consume and a growing middle class in Asia and South America ask for more fuel, too.

Without a hurricane or other natural disaster affecting the gasoline infrastructure, Americans are almost guaranteed to see the price at the pump fall in the coming months.

All three commenters noted gas prices typically peak in August and then tumble in September and October. Part of this is due to lower demand as the summer driving season ends, but most of it comes from switching from a purer, more expensive summer mix designed to withstand high temperatures to a less pure winter mix that's cheaper to produce.

Nevertheless, warming seas and stronger storms call the oft-proven price drop into question. If infrastructure is disrupted, prices will remain high.

On Aug. 10, the National Oceanic and Atmospheric Administration released its prediction for an "above-normal" level of hurricane activity in the Atlantic due to elevated sea temperatures. It's projecting between two to five major hurricanes.

Hurricane Hilary is expected to make landfall in Baja California on Saturday.