NPR

What's Behind The Recent Hike In Gas Prices?

A gas station in Berlin, Vt., sold gas for $3.72 on Feb. 16. On average, regular gas is going for $3.60 a gallon nationwide. (AP)

Oil prices have jumped sharply in the past two weeks, and the price of gasoline is also moving up. Across the country, a gallon of regular costs nearly $3.60 on average, with some areas facing $4 gas. That's causing sticker shock at the pump, and concern that rising prices could derail the economic recovery.

According to Daniel Yergin of Cambridge Energy Research Associates, gas prices are up because of the West's current confrontation with Iran and sanctions over that country's nuclear program.

"Right now the market focus is on a tightening of supply, because the whole direction of these policies is to do one thing, which is to reduce Iran's ability to export oil," Yergin says.

That's driven crude oil prices in the U.S. to around $106 a barrel. But Fadel Gheit, senior energy analyst at the investment firm Oppenheimer and Co., says there's an even bigger reason than Iran.

"The supply of gasoline has been declining," Gheit says. "We have 700,000 barrels of refining capacity [that were shut down] in the last three months. That is almost 5 percent of U.S. gasoline production ... now offline."

Energy analyst Phil Verleger says that's an amazing drop in refining capacity.

"I've been following the industry since 1971," he says, "and never in my life have I seen so many refineries close all at once."

Sunoco, Conoco and Hess have all retired outmoded, unprofitable refineries in the eastern U.S. and Caribbean. The shuttered refineries were not retrofitted to meet the requirements for removing sulfur from high-sulfur crude. As the supplies of "sweet" low-sulfur crude that they could refine have contracted and become more expensive, they became money losers.

And, according to Verleger, a big European refinery that sent gasoline to the U.S. has also closed.

Gheit says there's still another interesting ingredient to consider.

"Because the global market is much more lucrative than the domestic market, for the first time in our history we are not importing gasoline," Gheit says. "Not only are we not importing gasoline, we're actually a net exporter of gasoline."

So while gasoline supplies are short and prices are rising, big U.S. oil companies are exporting gasoline. Ironically, that's because natural gas prices in the U.S. are so low. American refiners are using this cheap, domestic natural gas to produce the heat needed to crack crude oil into products like gasoline.

"That enables us to land gasoline in Mexico, for example, cheaper than Mexican refiners can produce it for," Gheit says.

It's part of the very surprising energy advantage the U.S. is developing thanks to techniques like fracking and horizontal drilling, which are producing once-unimaginable amounts of natural gas inside the U.S. But will the higher oil and gasoline prices stall the U.S. recovery? Yergin thinks they could.

"Every penny increase in the price of gasoline takes a billion dollars out of the pockets of consumers over a year," he says.

That could hurt spending and cost jobs across the economy. But Verleger is more optimistic.

"For the first time in my life I'd say that this time higher oil prices might actually stimulate a little more economic activity rather than a little less economic activity," he says.

That's because the higher prices are causing many people to buy fuel-efficient cars, boosting the output in one of the country's major industries.

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Transcript

AUDIE CORNISH, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Audie Cornish.

MELISSA BLOCK, HOST:

I'm Melissa Block. And in this part of the program, the cost of oil in an election year. Oil has jumped sharply in the past two weeks and the price of gas is also moving. A gallon of regular costs nearly $3.60 on average. In some areas, more like $4. Some worry that could hurt the economic recovery and it's raising a lot of eyebrows at the pump.

In a moment, how gas prices affect presidential politics. First, NPR's John Ydstie tells us what's behind the rising costs.

JOHN YDSTIE, BYLINE: Like other people around the country, these customers at filling stations in Charlotte, North Carolina and Harrisburg, Pennsylvania are feeling the pain of higher gas prices.

UNIDENTIFIED WOMAN: Well, one, it makes me angry to see the prices go up and down and all over the place.

UNIDENTIFIED MAN: You know, you got the haves and the have-nots. I got to work from paycheck to paycheck, so I ain't got no choice. Either I get the gas or my car sits.

UNIDENTIFIED MAN 2: It's just a sign of the times. Everything's expensive.

YDSTIE: Daniel Yergin of Cambridge Energy Research Associates says gas prices are up because of the West's confrontation with Iran and sanctions over its nuclear program.

DANIEL YERGIN: Right now, the market focus is on a tightening of supply because the whole direction of these policies is to do one thing, which is to reduce Iran's ability to export oil.

YDSTIE: That's driven crude oil prices in the U.S. to around $106 a barrel. But Fadel Gheit, senior energy analyst at the investment firm Oppenheimer and Company, says there's an even bigger reason than Iran.

FADEL GHEIT: The supply of gasoline has been declining because we have 700,000 barrels of refining capacity were shut in in the last three months. That is almost 5 percent of U.S. gasoline production is now offline.

PHIL VERLEGER: This is just an amazing drop in refining capacity.

YDSTIE: That's energy analyst Phil Verleger.

VERLEGER: I've been following the industry since 1971 and never in my life have I seen so many refineries close all at once.

YDSTIE: Sunoco, Conoco and Hess have all retired outmoded, unprofitable refineries in the eastern U.S. and Caribbean. And Verleger says a big European refinery that produced gasoline that was exported to the U.S. has also closed. But there's still another interesting ingredient to add to this gas price stew, says Fadel Gheit.

GHEIT: Because the global market is much more lucrative than the domestic market, for the first time in our history, we are not importing gasoline. Not only are we not importing gasoline, we're actually a net exporter of gasoline.

YDSTIE: So while gasoline supplies are short and prices are rising in the U.S., the big oil companies are exporting gasoline. Ironically, that's because natural gas prices in the United States are so low. U.S. refiners are using this cheap, domestic natural gas to produce the heat needed to crack crude oil into products like gasoline.

GHEIT: That enables us to land gasoline in Mexico, for example, cheaper than Mexican refiners can produce it for.

YDSTIE: It's part of the very surprising energy advantage the U.S. is developing because of techniques like fracking and horizontal drilling. They're producing once unimaginable amounts of natural gas inside the U.S. But will the higher oil and gasoline prices stall the U.S. recovery? Dan Yergin thinks they could.

YERGIN: Every penny increase in the price of gasoline takes a billion dollars out of the pockets of consumers over a year.

YDSTIE: That could hurt spending and cost jobs across the economy. But Phil Verleger is more optimistic.

VERLEGER: For the first time in my life, I'd say that this time higher oil prices may actually stimulate a little more economic activity rather than a little less economic activity.

YDSTIE: Verleger says that's because the higher prices are causing many people to buy fuel-efficient cars, boosting the output in one of the country's major industries. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

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