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Gas Prices & Crude Oil: An Up & Down Relationship

If you want to make gasoline, you need crude oil and a refinery.   It's therefore easy to jump to the conclusion that the price of the two rise and fall in unison.  While they have tracked eachother in the last few months, it's not always the case.  Gasoline and Crude Oil, while closely correlated, are two seperate commodities that can be influenced by different market factors.  When they head in different directions, the questions start coming fast and furious.  The folks at Fuel Focus have done a great job compiling a timeline of the major events over the last four years.

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I can remember each event and the conversations I had with reporters, customers and friends at the time.  Crude oil prices didn't move, but gasoline went up...what's going on?  Explaining that the two sometimes reacted differently to market forces was met with a healthy amount of skepticism.  Some thought it was something more sinister.  But history sometimes provides the context that we ignore in the present.  Fuel Focus gets full credit for the following summary.

May 2004 - Tight gasoline supplies in the U.S.
The strong recovery of the U.S. economy created higher than expected demand for oil products and prevented refineries from building gasoline stocks in advance of the peak driving season. Gasoline inventories in the U.S. were down 2% from the previous year and were significantly lower than the five-year average. With less gasoline available, the industry had limited flexibility to respond to changes in supply or demand.

August 2005 - Hurricane Katrina
Hurricane Katrina caused significant damage to offshore rigs, refineries, pipelines and ports in the Gulf of Mexico. The immediate loss of more than 25% of U.S. refining capacity created severe shortages of gasoline and other oil products across North America. The price impacts were felt worldwide as markets struggled to re-balance and European markets tried to free up product for export to the U.S. Within a few weeks, supply and demand were more balanced and prices subsided somewhat. However, nearly a year later the U.S. still had not returned to full refining capacity. Gasoline markets in North America remained very tight and prices continued to be volatile.

September 2006 – Geopolitical Uncertainties (Israel / Hezbollah Conflict; Iranian Nuclear Program)
Heading into the summer driving season, Canadian gasoline and diesel fuel prices were already well ahead of the previous year’s levels. The persistent rise in crude oil prices in the first half of the year was influenced by a series of international events which caused significant market instability. By the second half of the year concerns over possible conflicts in oil producing regions were reduced and prices declined upon higher inventory crude oil and gasoline levels.

May 2007 – Impact of Refinery Maintenance and Unplanned Outages
The rise in retail gasoline prices in the first half of 2007 was primarily the result of tight supply. Unusually extensive North American refinery outages in the early part of the year, combined with the rising summer demand, caused prices to increase much earlier in the season. In the latter part of the year, pump prices were influenced by the significant rise in crude oil prices. The most influential event affecting crude oil prices was the significant depreciation of the U.S. currency.

January to May 2008 – Rising World Crude Oil Prices
World crude oil prices pushed upward on strong world economic growth leading to increased demand for oil. In addition, moderate non-OPEC supply growth and the increased participation of non-commercial traders into the commodity oil market further increased prices.

So there you have it.  While gasoline and crude oil are closely connected, they can sometimes be a little unpredictable.  But what long-term relationship doesn't benefit from a little spontaneity and some alone time?

Photo Credit:  Fuel Focus

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