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Gas Price Spike

This week, the national average for a gallon of unleaded gas climbed to $1.73, forcing many drivers to shell out $20, $30, or more to fill up. Ray Suarez discusses why prices at the pump continue to climb with Severin Borenstein, director of the University of California Energy Institute.

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  • RAY SUAREZ:

    The price of crude oil and gasoline has been steadily rising. For weeks, drivers have been noticing the increases every time they fill up at the pump, often racking up bills of $20, $30, or even higher. And this week, the national average for a gallon of unleaded gas climbed again, to $1.73.

    To help us understand what's behind these increases, I'm joined by Severin Borenstein, the director of the University of California Energy Institute. Professor, welcome. Of all the factors that go into pricing a gallon of gas, what's driving these latest increase?

  • SEVERIN BORENSTEIN:

    Well, in most of the United States, the increase we've seen is driven by a change in the price of crude oil. Since the beginning of the year, we've seen the price of crude go up by $6 or $7 a barrel, and that's reflected in the price of gasoline, which is going up and has gone up since the first of the year by 15 to 18 cents. That's just the increase in the price of crude.

  • RAY SUAREZ:

    There have been times earlier this decade where the price per barrel on world markets has been roughly the same, but now the pump price seems to be somewhat higher. Why?

  • SEVERIN BORENSTEIN:

    Well, actually, what's happened is as the price of crude has gone up, we've seen an increase in the price of gasoline on all of those times. But now the margin between the price of crude and the pump price we're paying has gone up gradually over time, and that reflects the increases in the cost of refining.

    One of the problems we've seen over the last decade is the cost of refining has gone up, both because we've started to run into a tighter refining market in the U.S., and because the requirements for that refining have gone up. A lot of the gasoline we're using, most of the gasoline now is a cleaner burning, reformulated gasoline that costs more to make. And it's more difficult to produce and more likely to result in spot outages that we've seen in California, certainly, and also in the Midwest at times where we haven't had enough gasoline. That's driven price through the roof.

  • RAY SUAREZ:

    Those places that you mention — California, some parts of the Midwest — have also been price hot spots. How does that happen, that one part of the country pays sometimes 20 cents or even more per gallon higher rate?

  • SEVERIN BORENSTEIN:

    In fact, California right now, while the rest of the country has been going up 20 cents since the beginning of the year, we've gone up 40 or 50 cents here in California. California uses a different fuel than the rest of the country, a cleaner burning gasoline. We are sort of a reflection of what the rest of the country has coming a few years from now. Our demand has continued to grow and has outstripped the refining capacity in the state. We are running into these outages localized just to the state.

    When it happens, we see the price go through the roof. When we had a price jump in the Midwest last summer or… yeah, that was the result of a pipeline outage that caused a brief shortage in a certain part of the upper Midwest. When you see the shortages anywhere in the country, because people need to get their gasoline, the price jumps quite a bit.

  • RAY SUAREZ:

    World prices are denominated in U.S. dollars. Does the currently weak dollar force OPEC to make different decisions about how much oil it's going to pump?

  • SEVERIN BORENSTEIN:

    The weak dollar certainly is affecting OPEC's decisions on how much oil to produce, because right now they're getting smaller revenues in other currencies for their oil because they continue to sell it in the U.S. dollar, and the dollar has been falling relative to the other currencies. Whether it actually determines how much they're going to pump is a more political question of what they feel they need to get in revenue and, of course, what they think they can get away with politically in their dealings with the United States.

  • RAY SUAREZ:

    Well, we here in America are moving into a big demand season in a few months. Does it looks like there is going to be more oil on the world market, or does it look like these high prices are going to continue?

  • SEVERIN BORENSTEIN:

    Well, OPEC is continuing to threaten to restrict the output further, but the oil markets really don't believe them very much. Best forecast in the futures markets right now is that prices are going to gradually come down from their currently very high level, $37 a barrel, and drift downward throughout the summer into fall. If that happens, we're likely to see prices at least stabilize through most of the country, possibly even come down somewhat.

    Offsetting that, though, is that we are going into a period of higher demand where refineries often are able to get a higher refinery margin. So we might see that the oil price component goes down but the refinery component drifts upward, and we might not see much relief from the current high prices.

  • RAY SUAREZ:

    Severin Borenstein, thank you for being with us.

  • SEVERIN BORENSTEIN:

    Thank you.

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