Updated: Gas prices... What's real and what's hype in advance of Memorial Day
Bottom Line: Gas prices are currently averaging $2.92 per gallon nationally. That means that in many places across the country we've crossed $3 per gallon. Based on the attention it's receiving in the news, you'd think that we were sitting near $5 per gallon. Recently I took the time to explain what's really going on with gas, most of which isn't ever discussed or likely understood by most in the news. It comes down to three-real changes.
The value of the US dollar
The change to the EPA-mandated summer blend of fuel
An increase in demand due to a strong economy
Starting with the US dollar... As of this entry the US Dollar index, the value of the US dollar compared to a basket of leading world currencies is $93.38. That's 4.1% lower than a year ago. Because all commodities are US Dollar denominated (priced in US dollars wherever you buy them around the world), gas prices would 4% more expensive than they were a year ago if there were no other influences. A year ago today prices averaged $2.37 per gallon, so ten cents per gallon, is directly related to the change in the value of the dollar. Next up is the summer blend of fuel. The EPA mandated summer blend of fuel has taken on added significance and cost this year. Every spring you hear about the refineries coming offline to make changes. Those changes are related to the EPA mandated summer blend of fuel that's supposed to be more environmentally friendly. The deadline is June 1st. In recent years it hasn't been a big deal because there was excess capacity at most refineries, so the changes could be made without significant supply issues. With the best economy in over twelve years and record high American employment that's not the case this year. The result is that a cost increase of about 12 cents per gallon has been added due to this change this year. Those two factors account for 22 of the 55 cent difference. Now enter inflation. With the faster growth economy comes higher inflation. Inflation is pacing 2.5% over the past year. That's another 6 cents per gallon.
Put it altogether and 28 of the 55 cent per gallon difference is directly related to those static factors. 27 cents per gallon are related to other factors including supply and demand, geo-political factors, etc. Perspective is also key. Consider that four years ago today the average gas price was $3.65 per gallon (which is the equivalent to $3.83 per gallon in today's money). Or than in 2012 the average price was $3.60 for the entire year. And to set a new record it'd take a lot more than that.... The record high for average gas prices was $4.11 in July of 2008. That's the equivalent of $4.66 per gallon in today's dollars. So, it can be and has been significantly worse and at a time in which the economy wasn't near as strong as today. That being said, according to AAA, 75% of Americans might alter their decision making with prices at $3 per gallon – so that's worth watching – even if it's impact is more phycological than practically different.
If you're looking for a silver lining – there's a good chance that prices will peak this week and taper off a bit after Memorial Day. The completion of the refinery changes along with lessoning demand after Memorial Day should result in lower prices.