Why are Gasoline and Diesel Prices So High? (Relative to Crude Oil Prices)

Abstract

Gasoline prices at the pump in the U.S. closely tracked the stunning collapse of crude oil prices in the second half of 2014. However, this was not the case during 2015. As documented in this recent farmdoc daily article (August 28, 2015), the historical relationship between Brent crude oil prices and U.S. average gasoline prices at the pump suggested that gasoline prices in August should have been about $2.00 per gallon, but were stuck above $2.60 per gallon. A similar result was found for diesel prices in this companion farmdoc daily article (September 30, 2015). It was argued in both articles that the gap between predicted and actual gasoline or diesel prices could be traced to the improving U.S. economy and sharply lower crude oil prices, which, in combination, spurred gasoline and diesel quantity demanded and pushed the production capacity of the U.S. refining industry to the limit. The purpose of today’s article is to provide a more detailed explanation why gasoline and diesel prices in 2015 have been elevated relative to crude oil prices.