Why gas prices vary so much from one place to the next:
The price of gasoline can differ wildly depending on where you live. A driver fueling up in Denver will pay, on average, $3.64 per gallon. But just a couple states over in Chicago, gas goes for north of $4.28 for gallon. That’s about a $10 difference to fill up an average gas tank. Why the disparity?
James Hamilton has an excellent, chart-filled post breaking it down. Part of the story is taxes — different states tax gasoline at different rates, depending on how much highway revenue they want to raise (it’s 67.4 cents per gallon in New York and just 38.4 cents per gallon in Texas). Some states, like California, have laws requiring cleaner-burning fuels. That also drives up the price.
But another part of the story is pipelines. Right now, Canada and North Dakota are experiencing a boom in oil drilling. Yet there isn’t enough pipeline capacity to carry all that newfound crude down to the Gulf Coast refineries. So it has to sell for a discount in the Midwest. You can check out the variation here. Light sweet crude in Wyoming sells for $97 per barrel. If those producers could send it all down to Louisiana, where refineries have access to larger global markets, they could sell the crude for $125 per barrel. But there aren’t enough pipelines, so they can’t. As a result, states like Denver and Wyoming benefit from the glut of cheap oil that has nowhere else to go.
(And yes, that’s why some analysts think that the southern leg of TransCanada’s Keystone XL pipeline, which will run from Oklahoma to the Gulf Coast and is set to begin construction in June, could raise gas prices in the Midwest by a bit.)
Adding a bit to Hamilton’s post, there are other quirks and oddities in the oil transportation network. For instance, thanks to a wave of refinery closings, the northeastern United States is facing the prospect of gasoline shortages this summer. In theory, refineries could just ship surplus fuel from the Gulf Coast up to the Northeast. But any shipments between U.S. ports are covered by the Jones Act of 1920, which means they have to be done by U.S.-built ships that are largely crewed by U.S. citizens.
Trouble is, there are only about 56 tankers in the world that fit that description, and many are already booked up for months on other routes. So there’s a shortfall. As Reuters explains at great length here, President Obama does have the authority to waive the Jones Act, but then he risks angering his union supporters. It’s unclear whether doing so would save the Northeast more than a few pennies per gallon, if that. But it’s yet another reminder that oil markets are rarely as smooth and fluid as they first appear — there are always a few sticky spots.
The price of gasoline can differ wildly depending on where you live. A driver fueling up in Denver will pay, on average, $3.64 per gallon. But just a couple states over in Chicago, gas goes for north of $4.28 for gallon. That’s about a $10 difference to fill up an average gas tank. Why the disparity?
James Hamilton has an excellent, chart-filled post breaking it down. Part of the story is taxes — different states tax gasoline at different rates, depending on how much highway revenue they want to raise (it’s 67.4 cents per gallon in New York and just 38.4 cents per gallon in Texas). Some states, like California, have laws requiring cleaner-burning fuels. That also drives up the price.
But another part of the story is pipelines. Right now, Canada and North Dakota are experiencing a boom in oil drilling. Yet there isn’t enough pipeline capacity to carry all that newfound crude down to the Gulf Coast refineries. So it has to sell for a discount in the Midwest. You can check out the variation here. Light sweet crude in Wyoming sells for $97 per barrel. If those producers could send it all down to Louisiana, where refineries have access to larger global markets, they could sell the crude for $125 per barrel. But there aren’t enough pipelines, so they can’t. As a result, states like Denver and Wyoming benefit from the glut of cheap oil that has nowhere else to go.
(And yes, that’s why some analysts think that the southern leg of TransCanada’s Keystone XL pipeline, which will run from Oklahoma to the Gulf Coast and is set to begin construction in June, could raise gas prices in the Midwest by a bit.)
Adding a bit to Hamilton’s post, there are other quirks and oddities in the oil transportation network. For instance, thanks to a wave of refinery closings, the northeastern United States is facing the prospect of gasoline shortages this summer. In theory, refineries could just ship surplus fuel from the Gulf Coast up to the Northeast. But any shipments between U.S. ports are covered by the Jones Act of 1920, which means they have to be done by U.S.-built ships that are largely crewed by U.S. citizens.
Trouble is, there are only about 56 tankers in the world that fit that description, and many are already booked up for months on other routes. So there’s a shortfall. As Reuters explains at great length here, President Obama does have the authority to waive the Jones Act, but then he risks angering his union supporters. It’s unclear whether doing so would save the Northeast more than a few pennies per gallon, if that. But it’s yet another reminder that oil markets are rarely as smooth and fluid as they first appear — there are always a few sticky spots.
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