published Wednesday, March 13th, 2013

Personal Finance: A little relief at the gasoline pump — for now

Chris Hopkins
PRICE AT THE PUMP

The average price of a gallon of gas in Chattanooga fell Tuesday to just over $3.50 a gallon, or 5 cents a gallon cheaper than last week and 6 cents a gallon below a year ago. Nationwide, AAA’s fuel gauge survey found the gas prices averaged just over $3.70 a gallon for regular gas on Tuesday, a dime per gallon cheaper than a year ago.

Gas prices are heading back down at last. Coming in tandem with the end of the payroll tax holiday, expensive gasoline punched a hole in the family budget during the first two months of 2013. The good news is that prices headed back down in the past week. The bad news: the relief may not last.

At a national average of $3.71 per gallon, gas is still nearly 50 cents higher than it stood just before Christmas. Nevertheless, you will pay about 10 cents less than you did last year at this time. And for now, the trend should continue to moderate.

But don't get used to it. Several factors contribute to the ultimate cost at the pump, and most of them are likely to push back as we head into summer. Bummer.

The most significant constituent of the price of gas is the price of oil, roughly 72 percent of the total (the rest goes to taxes, refining and marketing). Thankfully, oil prices have been trending lower recently in response to decelerating global growth and its concomitant impact on demand for crude. But with inventories declining and the prospect of improved U.S. economic activity, the downswing in crude oil may be bottoming.

Perhaps more interesting is the seasonal impact on prices due to the refining process. All gasoline is not created equal. In fact, there are 18 separate unique formulations of motor fuel sold in the US, depending upon the locality, population density, relative air quality and time of year. EPA requirements necessitate a changeover from cheaper "winter" to more expensive "summer" blends as the temperature rises, in order to comply with environmental regulations and just in time to collide with higher demand during the vacation travel season.

Many refineries will soon begin the changeover process, requiring costly shutdowns and reducing supply during the conversion. And there are just 134 refineries operating today, versus 146 just five years ago.

One amusing contributor to the cost of gas is the ethanol mandate. Congress adopted legislation in 2007 that requires refiners to mix 13.8 billion gallons of ethanol into the gasoline supply in 2013. Problem is, producers will brew just 12.3 billion gallons of ethanol this year. The result: monetary fines in the form of purchased "ethanol credits" that must be paid by refiners for not using 1.2 billion gallons of ethanol that was never produced. Got that? And by the way, it is illegal to import ethanol to make up the difference.

Finally, consider the impact of the declining value of the U.S. dollar. Thanks to the efforts of the Federal Reserve to reduce interest rates, the purchasing power of the dollar has weakened. Since oil is traded in dollars, the result is higher crude prices. To the extent that the Fed continues its easy money policy, expect oil costs to rise and eventually be translated into higher gas prices.

So for the next few weeks, enjoy the relief. It may not last.

Christopher A. Hopkins CFA, is a vice president at Barnett & Co.

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