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Oil prices are low, but some states see gas prices spike

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First it was California. Now the latest spike in gasoline prices is in the Midwest, where drivers in Michigan are paying 23 cents a gallon more, bringing regular to $2.81 a gallon. How does this happen, when crude oil prices are at six-year lows? Not coincincidentally, there was a BP refinery breakdown outside of Chicago, the Midwest’s largest. 

But refineries shut down all the time. It’s when there’s an unplanned outage at a major one that gas prices spike.

“And so that is sending a very big signal to the market that their supply chains need to adjust accordingly,” says Mason Hamilton, petroleum markets analyst with the U.S. Energy Information Administration.

These markets in the Midwest are essentially saying, “Send us gasoline from somewhere else in the Midwest or the Gulf Coast—just get it to us!”

How much gas prices increase depends on a few things: “The tightness in the market, and the costs of acquiring those new supplies,” Hamilton says.

And right now, the market is very tight. 

“The reality is that the demand for gasoline is up 6.6 percent for the latest four weeks compared to a year ago. So that’s a big demand growth in this country and we haven’t seen that in a very long time,” says Steven Kopits, managing director of Princeton Energy Advisors.

That’s pushing oil refineries to the limit, according to Guy Caruso, senior adviser at the Center for Strategic and International Studies. He says right now, refineries are running at more than 90 percent capacity.

“And any time you’re running that many industrial facilities at that high rate,” he says, “you’re vulnerable to disruptions or industrial accidents or breakdowns.”

So why not build more refineries to handle demand? Caruso says for one thing, it’s difficult to get environmental permissions. And secondly, it’s not been a very profitable business. Until now.

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