Why gas prices climbed 13 cents in a week, and look set to keep going

Demand has been dropping, but supply problems are causing gas prices to rise again. A refinery fire in California and a broken oil pipeline in the Midwest are partly to blame.

As summer heads into its last month, the price of a gallon of gasoline keeps rising and rising.

In the past week, nationally, the average price at the pump is up 13 cents, to $3.65 a gallon. That's 27 cents a gallon higher than it was a month ago. And by tomorrow, the price could be higher than it was a year ago – the first time that has happened since the end of April. In some states, a return to $4 a gallon is becoming a possibility.

What’s happening to cause the price to rise so quickly?

Some of the rise is the result of bad breaks, say some energy analysts. A big refinery fire this week in California and a pipeline leak in the upper Midwest have hit at just the wrong time. In addition, the price of crude oil has been rising as the markets have become increasingly convinced that Europe will solve its debt woes. If that happens, the theory goes, the European economy won’t worsen, and demand for oil may rise.

Rising prices at the pump may have some political ramifications, as Americans grouse over their rising fuel bills. Earlier this year, the oil industry and congressional Republicans criticized President Obama for rejecting the Keystone XL natural-gas pipeline from Canada that would go through environmentally sensitive areas en route to the Gulf of Mexico.

“The problem is that the price of gasoline is a very visible, tangible piece of evidence to the problems of the economy. It is something people experience in a direct way, as opposed to some of the economic indicators which are more abstract,” says Lee Miringoff, director of the Marist College Poll in Poughkeepsie, N.Y. “It comes as unwelcome news to Team Obama.”

The rising price also comes as many Americans are starting to pack their cars for an August vacation. “We are in the last month of the driving season,” says Avery Ash, manager of regulatory affairs at AAA in Washington. “After Labor Day, it’s our expectation that gasoline prices will come back down as we have lesser demand and there is the switchover from summer blends of gasoline to winter blends, which are easier to produce.”

Last year, the price of gasoline fell by 40 cents a gallon between Labor Day and Christmas, he notes.

The August price increase is not unprecedented. However, data from the Energy Information Administration show that demand is down about 4 percent over the past four weeks.

“This [price increase] is not demand-driven, but supply-driven,” says Tom Klozo, chief oil analyst at Oil Price Information Service in Gaithersburg, Md.

This summer, some of the biggest price hikes related to supply problems were in Illinois, Michigan, and Wisconsin, after the Enbridge Pipeline was shut down for 12 days after it sprang a leak in mid-July. The price of gasoline in Illinois spiked by 40 cents a gallon between July 30 and Aug. 6, and it rose by 38 cents a gallon in Michigan and 33 cents a gallon in Wisconsin, says Mr. Ash.

On Tuesday, Enbridge, based in Calgary, Canada, said it is reopening the 1,900-mile pipeline that supplies crude oil to Chicago-area refineries. By Wednesday morning, gasoline prices had fallen about 2 cents a gallon in Illinois, AAA reported.

This week, a fire at a Chevron refinery in Richmond, Calif., resulted in the temporary loss of about 15 percent of the gasoline produced in the Golden State. Panic buying on the spot market pushed prices up by as much as 30 cents a gallon in a matter of days, says Ash. Since then, Chevron has said that only one part of the refinery – a section that turns crude oil into the raw feedstock used to make gasoline and other products – was damaged.

“It looks like the refinery has lost the ability to run crude for about six weeks or more,” says Mr. Klozo. “But they can continue to make gasoline, diesel, and other products if they can buy the raw feedstock from other refiners on the West Coast or from offshore.”

As Chevron has analyzed the damage to its refinery, prices in California have started to stabilize.

“We’ve seen wholesale prices come back down some,” says Ash, who estimates that California consumers could pay an additional 10 to 20 cents a gallon until Chevron gets the entire refinery operating efficiently. “That’s better than initially expected,” he says.

While the US is struggling with pipeline and refinery issues, the price of crude oil has been rising. Since the end of June, it is up by $15.66 a barrel.

“It’s called the Mario Draghi bounce,” says Phil Flynn, a senior market analyst at the PRICE Futures Group in Chicago, referring to the president of the European Central Bank, who has been working on ways to solve Europe’s debt woes. “If he is successful at bailing out Europe, it will keep oil prices high.”

On Wednesday, the price of crude oil on the futures market closed at $93.40 a barrel, off 28 cents a gallon from Tuesday.