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Gasoline Prices Should Stay Low for Summer Despite Supply Disruptions

Current supplies of gasoline and expected production this year should keep prices at the fuel pump 40-60 cents per gallon lower than last summer despite supply disruptions that have pushed prices higher in recent months, especially in the Midwest, Purdue University energy economist Wally Tyner says.

“We enter the summer season with gasoline and crude oil markets a bit out of kilter,” he said.

Tyner said U.S. crude oil and gasoline supplies are above normal, which would suggest that prices should fall. But he noted that several disruptions in supplies globally have moved prices higher. Crude oil prices have increased about 80 percent since January, from $26 per barrel then to $47 on Monday (May 16).

“Yet all the forecasts call for global production to exceed consumption through the end of 2016,” he said. “So what, we might ask, is going on?”

Here’s the situation, as Tyner explains it:

  • There have been long-term supply issues in Nigeria and Venezuela. Production in Nigeria is at a 22-year low because, in part, of civil war, and political instability in Venezuela “continues to put a drag on production,” he said.
  • A labor strike in Kuwait halted production there for several days. That strike has now ended.
  • The biggest disruption affecting the Midwest involves the Canadian oil sands, where a widespread fire in Alberta province shut down Canadian oil sand production. Although the fire was not in the oil sands area, it destroyed the living paces of most of the workers, so production was halted. That resulted in a loss of 1 million barrels per day for U.S. imports.

Because the largest refinery in the Midwest gets a large share of its crude from the Canadian oil sands, particularly affected are consumers in Indiana, Michigan, Illinois and Ohio, Tyner said.

“So the bad news is that until Canadian oil sand production gets back up to normal, we are likely to see higher prices than in previous weeks,” he said.

Despite that, Tyner said the standard production and consumption trends suggest prices at the pump staying fairly steady over the summer.

Consumers are expected to drive more this summer, but production should keep prices 40-60 cents per gallon lower than the summer 2015 range of $2.60 to $2.80.

“Of course, just like the Canadian wildfire, unforeseen supply disruptions can always send prices up temporarily,” Tyner said. “But with global production forecast to exceed consumption through 2016 and inventories already high, we should be able to weather any temporary disruptions.”

Source: Keith Robinson and Wally Tyner, Purdue University

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