Nathan Wilson | Reporter
Gas prices increased dramatically following Russia’s invasion of Ukraine and the sanctions imposed by Western countries, but the root causes of high prices are more complicated.
Peggy Lemons manages the Texaco station on University Parkway. She remarked on the surging price of gasoline while discussing the difficulty she has had maintaining inventory. “Gas is going through the roof now, because of the war,” she said. “You wouldn’t think that would affect little old Natchitoches.”
Louisiana is home to around 20 percent of US refinery capacity and processes oil sourced both domestically and abroad, and yet Louisiana consumers aren’t catching a break on prices because of the way oil is bought, processed into gasoline and sold.
Oil’s status as a globally traded commodity is responsible for the relationship between international events and price increases in Natchitoches. Camille Lott, Marketing Coordinator for Lott Oil Company, explains that only eight percent of US oil imports came from Russia last year, but that Europe’s behavior adds to the prices paid by consumers. “Once Europe begins to tap into our current larger suppliers… this will increase the demand while supply has trouble staying caught up.”
Lott explains that part of the cost increase consumers see now is because refiners switch to more expensive blends of gasoline during the summer. “Refiners alter the blend for warmer months, creating a higher-grade fuel, but it’s pricier than the winter fuel blend that ignites and evaporates easier.” She also points out that changing the fuel composition is a federal requirement meant to prevent fuel from being wasted. “Gas is more likely to evaporate from your vehicle quickly during warmer weather, increasing both emission and smog,” she said.
Dr. Mark Swanstrom, professor of finance at Northwestern State, explains that the price of oil is only part of the cost consumers pay. “Crude oil prices make up about half (43%-56%) of the price of gas at the pumps,” he said. When buying gasoline, consumers are also paying for the cost of refining the gasoline, state and federal taxes and the profits that keep refiners in business. As a result, consumers don’t see the full effect of oil price fluctuations. “Gas prices are about half as volatile as crude oil prices,” he indicated.
Swanstrom also explained why gasoline prices increased before any action was taken on Russian oil imports. “Oil prices jumped again after the Russian invasion of the Ukraine. Part of this is due to actual disruptions in supply, but part of it is due to expectations of reduced supply,” he noted.
The preemptive increase in price is a result of oil’s role as a commodity. With a network of investors engaged in purchasing oil, much of the oil produced at any given time is purchased by companies that store, transport or invest in oil.
Dr. Jim Picht, professor of economics at Louisiana Scholars’ College explains that these companies are incentivized to wait to sell their supplies if they believe the price will increase. “People seem to think that if you bought oil for $40 per barrel, you should refine it into gasoline whose price reflects that $40 cost, but rather than refining it, you could sell it down the road.” He points out that since oil takes time to deliver, it is typically sold at the price it is expected to command when it is used. He points to parallels in other investments consumers purchase and later resell such as gold, with the most familiar being housing. A consumer who bought a home decades ago wouldn’t expect to sell it for the same price today, “You don’t set prices based on your costs when you bought your inputs, but based on your costs if you bought those inputs today.”
Picht indicates that petroleum trading markets allow oil to be used where it’s needed. “Secondary markets allow, say, owners of a tanker full of oil on the high seas to trade it for oil in storage near a refinery,” he said. “Those secondary markets help push future costs forward, but they also push future delivery forward.” Swanstrom notes that high gas prices might prove temporary, and points to oil futures as a sign. “Oil futures prices for later in 2022 are lower than spot prices. The market expects oil prices to fall.”
Nathan Wilson | Reporter