Rising Demand + Falling Supply = Higher Gas Prices

Gas prices (red line in the chart above) are now above $3/gallon in the U.S., and average $3.18 in Michigan, up by almost $1 since just January. Why so high, and how high will they go?

According to the WSJ, "Gasoline prices, already flirting with $3 a gallon, could move even higher during the summer driving season. It all depends on refineries, weather and drivers' tolerance for expensive fuel.

How high prices go this summer depends largely on what happens to the refineries that crank out the nation's fuel. Refinery outages in recent weeks, largely for maintenance, are part of the reason fuel prices have rocketed up. If refinery operations smooth out, gas prices could remain stable or even fall."

According to the American Petroleum Institute, gas has recently become more expensive because of:

1. Rising crude oil prices (see blue line in chart above)
2. Rising and record-high demand for gas in the U.S.
3. Rising prices for ethanol, which is blended in 50% of gasoline
4. Annual transition to more expensive “summer blend” gasoline required by EPA
5. Less imported gasoline because of spring refinery maintenance in Europe

In other words, gasoline prices have risen recetnly for the main factors that always cause prices to rise: a) Increase in demand, b) Decrease in supply, and c) Regulation.

Q.E.D.