Gasoline Prices Expected To Rise Due to Sanctions

"Amanda Morgewicz began delivering groceries for Instacart about two years ago. The extra money was good at first, but with gasoline now costing about $3.40 a gallon on average in the U.S., compared with $2.40 when she started, she is thinking harder about which orders to take on.

The jobs that involve too much driving aren't worth it anymore.

"You have to be strategic about which ones you pick because you could really just be breaking even," said Ms. Morgewicz, who lives in Walden, N.Y.

Gasoline prices in the U.S. are down significantly from last June, when they were above $5 a gallon. They are still up some 40% from two years ago, and analysts are betting they could soon go higher.

About half the rise in prices over the past two years stemmed from an increase in the cost of crude oil used to make gasoline. Most of the rest stems from a growing gap between the wholesale prices of crude and gasoline. That gap, or premium of gasoline to crude, goes to the bottom line of refining companies and is up about 80% since Ms. Morgewicz started her job.

Gasoline's premium to crude has lagged behind that of its sister products, diesel and jet fuel, whose premiums have more than doubled and quadrupled respectively over the past two years. Some analysts said gasoline's premium is poised to surge further because of a looming shortage of a petroleum product called vacuum gas oil.

VGO is the sludge that remains after lighter and more valuable products are distilled by refiners out of crude oil. Complex refineries, like many in the U.S. and Europe, have the equipment to process VGO and turn it into gasoline. Simpler ones, like many in Russia, lack this capability. Until recently, Russia was the world's largest exporter of VGO, and most of it went to the U.S. and Europe.

Now, Western sanctions on Russia's exports of refined products, which took effect this month and which halted most European imports of VGO, could reduce the capacity of the U.S. and its allies to make gasoline. The sanctions' potential impact on diesel supplies and prices is widely recognized, but it could pale in comparison with the possible consequences on those of gasoline.

The world's refining capacity is about 900,000 barrels a day less than it was in 2019, according to Rick Joswick, head of global oil analytics at S&P Global Commodity Insights.

The premiums of fuels to crude have climbed as a result, pulling the profit margins and share prices of such refiners as Valero Energy Corp., Marathon Petroleum Corp. and Phillips 66 up with them. Diesel led the way, in part because demand for it remained robust during the pandemic.

Gasoline has held up the rear, with a premium to crude oil of $24 a barrel versus $30 for jet fuel and $35 for diesel.

"Gasoline is going to be crazy tight this summer" should Russian VGO disappear from the market, said Amrita Sen, director of research at the consulting firm Energy Aspects." [1]

 

Slyva for Ukraine. For rest of us - fig. 

1. Gasoline Prices Expected To Rise Due to Sanctions
Henderson, Bob.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 23 Feb 2023: B.11.