Clarifying regional gasoline prices

By now almost everyone is aware that there are substantial price differences at the gasoline pump when you start travelling across the country. I decided to look into this.

Source: Econbrowser

The reasons why regular gasoline may sell for $ 3.40 in Wyoming versus $ 4.40  in California and $ 3.80 on the East Coast, can be explained in terms of (a) types of crude oil used to produce the gasoline, (b) availability and location of the refineries making the gasoline for a given region, (c)  differences in transport charges between producing regions and refineries located in various parts of the U.S., (d)  gasoline quality differences and (e) variations  in State taxes.

Low gasoline prices are realized when refineries run on domestic crude oil that can be sent to the refinery via pipeline. Thus refineries in Texas and in other states that produce or are close to crude oil production (e.g. in North Dakota, Wyoming, Iowa) will make gasoline that sells at the low end of the cost spectrum, unless the state has a particularly high state gasoline tax (e.g. Illinois).

Domestic crude oil, generally priced at or close to West Texas Intermediate (WTI), an industry terminology for a standard low sulfur crude, now sells for around  $ 100 per barrel, the price normally set by domestic supply-demand. Outside the U.S., crude oil prices are set by North Sea oil, known as Brent Oil. The price of this is currently much higher than WTI, now around $ 125 per barrel, a price set by global supply-demand. And there is even higher-priced oil that is “sweeter” (i.e. contains less or no sulfur) than Brent Oil – e,g, Lybian and some other West African crudes. Much of the world runs crude oil priced relative to Brent Oil.

Both WTI and Brent crude prices are now higher than a price set entirely by supply-demand considerations, because of a current premium associated with speculation regarding a possible oil crisis msy be created by International events.

Getting back to the U.S. regional situation, refineries on both the East and West Coast mostly run on imported oil at world prices(Brent Oil), thus starting with a 25% disadvantage relative to U.S. refineries running WTI crude.  Moreover, some U.S. East coast refineries were designed to run only “sweet” (i.e. the most expensive) crude, at a time when all crude oil was relatively cheap and refineries running sweet crudes were less expensive to construct, using equipment and piping that would corrode if sulfur-containing crude (knows as sour crudes) were the feedstock.  Some East Coast refineries are already shut down and some like Sunoco’s Philadelphia refinery (see picture) will shortly also close (unless a buyer is found), as economics make its operation unattractive.

Source: National Geographic

 Why can’t those refineries on the East and West Coast that were designed to run on sour crude oils  ( e.g. the large refineries you see from the Jersey Turnpike just South of Newark)  receive domestic crude at WTI prices and thereby make less expensive gasoline? That is because pipelines are not available to transport the domestic crude from the Gulf Coast or the Middle West to these refineries so the shipment must be by tanker. Transport between ports in the U.S. must use U.S. flag tankers under the so-called Jones Act and these tankers are more expensive to operate than foreign flag tankers, making the landed domestic crude as expensive as Brent Oil. The same is true for North Slope oil shipped to U.S. refineries on the West Coast or elsewhere.

Then, there are big differences in state gasoline taxes, e.g. California-66 cents; New Jersey 33 cents.

Finally, California gasoline is also more expensive because the state’s Clean Air Act legislation requires refineries to make even “cleaner” gasoline than that in the other states and that is more costly to produce; then add the high state tax.

Is everything clear?