If you watched the Sunday morning talk shows last weekend, you might have noticed a new advertisement (paid for by oil refiners) that attacks the Renewable Fuel Standard. The ad notes that consumers are paying record-high prices at the pump (something that has nothing to do with the RFS
), but conveniently fails to mention that refiner profits have hit record-high levels as well. Here’s what’s really going on: as the marketplace anxiously awaits the final RFS volumes for 2020-2022, oil refiners are attempting to divert attention away from their unprecedented profit margins and the impact those margins have on gas prices.
Once again, at a time when ethanol is clearly saving drivers money at the pump
, oil refiners and their allies are trying to mislead policymakers and the public about the real causes of higher gas prices.
Recent Price Trajectory
Refining margins have surged over the last few months, due in large part to geopolitical and seasonal factors. Prices of crude oil and refined products had been rising since late 2020 as a result of restrained production—mainly by the OPEC+ group of producers that includes Russia—and the economic recovery that followed the COVID-19 lockdowns. However, the price increase accelerated after Russia invaded Ukraine in February, as the U.S. banned imports of Russian petroleum and as other countries and private companies took steps to limit purchases.
Notably, the prices refiners receive for refined products (primarily gasoline, jet fuel, and diesel) have strengthened considerably more than the prices those refiners are paying for crude oil. Stocks of gasoline and distillates have fallen—particularly on the East Coast—and export demand has risen. Additionally, gasoline prices typically rise in the spring
, in advance of the summer driving season.
The relative strength of refined product prices is reflected in refining “crack spreads,” defined as the difference between product prices and crude oil prices on a per-barrel basis. The U.S. Energy Information Administration (EIA) notes
, “These spreads are often used to estimate refining margins. … The most common multiple-product crack spread is the 3:2:1 crack spread. A 3:2:1 crack spread reflects gasoline and distillate production revenues from the U.S. refining industry, which generally produces roughly 2 barrels of gasoline for every barrel of distillate.”
The 3:2:1 crack spread reached nearly $60/barrel during the last couple of weeks, which is almost triple the $20/barrel level around which it gravitated from September to January (Figure 1). This spread is calculated using prices of futures for West Texas Intermediate crude oil, gasoline (RBOB) and distillates (ULSD) that are traded on the NYMEX, a part of the CME Group. (The spread would be very similar using Brent crude prices.)