Why are gas prices up? Costs rise as heat wave, low oil supply take toll

As temperatures soar across the country, gas prices are following suit.

The national average for a gallon of regular unleaded jumped 13 cents last week to $3.71, an eight-month high, according to AAA motor club.

Higher pump prices are mostly attributed to steadily increasing oil prices since oil accounts for almost half the cost of a gallon of gas, but this summer’s heat wave blanketing the country has only further boosted pump prices, some experts say. Extreme heat prevents refineries, which convert oil into usable products like gasoline, from running at full capacity.

“If refiners in your region have lower or falling utilization rates, you’re more likely to see gas prices rise,” said Patrick DeHaan, head of petroleum analysis of GasBuddy, a platform that helps people find the cheap gas.

“We are seeing refiners in Texas, Louisiana, Tennessee and some other states struggle to run anywhere near at maximum rates,” said Tom Kloza, global head of energy analysis at Oil Price Information Service. “Petroleum engineers can tell you that when ambient temperatures get to the 100-degree neighborhood, it is difficult to run at maximum levels.”

Nationwide, refinery utilization decreased by 0.9 percentage points from last week to 93.6%, De Haan said. Gasoline production fell to 9.5 million barrels per day, and distillate fuel production dropped to 4.8 million barrels per day last week.

West Coast refineries posted the largest drop (2.4%) to 90.9%, followed by the Gulf Coast’s 1.5% decline to 93.3% and the Midwest slid 1.1% to 97.7%, he said. The last two regions – Rocky Mountains and East Coast – each rose.

“These percentages show how much of a region’s overall capacity was used to refine oil,” De Haan said. “It’s important to note these percentages because the lower the utilization percentage, the lower output, which has a direct impact on local gasoline prices.”

Oil prices, the largest single contributor to gas prices, rose $10 per barrel in July to a three-month high last Tuesday. “Raw crude price increases add 24 cents per gallon to the price of gasoline and other refined products,” Kloza said.

Production cuts from the Organization of the Petroleum Exporting Countries (OPEC) and its allies and sanctions on Iran, Venezuela and Russia shifting global crude supply are all affecting supply and boosting prices, said Natasha Kaneva, J.P. Morgan’s head of global commodities strategy.

Exports also cut into our supply at home. “We are exporting about two cargoes of gasoline (mostly from the Gulf Coast) for every cargo we import,” Kloza said. “We are the supplier of choice for Latin America, which has no additional refining capacity coming up this year.”

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Likely not.

Retail gasoline margins are around 27 cents per gallon now, or about one-third of what they were a year ago, Kloza said. “Thanks to higher wages and other costs, most retailers need something above 30 cents per gallon in order to maintain reasonable fuel profits,” he said. “So for now, the beneficiaries of the return of inflation to energy prices are producers of crude, and refiners, but not retailers. They are the messengers blamed for the message.”

In the short-term, prices may depend on refineries.

“There is the fear of more refinery downtime along with the major fear of a hurricane probability cone in the Gulf of Mexico,” Kloza said. “If those fears are removed, we will see substantial gasoline price drops, even if crude oil remains above $80 per barrel.”

U.S. West Texas Intermediate (WTI) crude was last at $79.67 per barrel and world benchmark Brent was at $83.81. Both are on track for a fifth weekly gain.

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday.