OPEC+ Production Cut Expected To Drive Up Gasoline Prices, but Higher Ethanol Blends Can Help

by Scott Richman (Renewable Fuels Association) ... To determine how these oil price forecasts would translate to U.S. retail prices of gasoline, RFA conducted a straightforward regression analysis.

Two approaches were used for the analysis. First, retail gasoline prices were regressed against Brent crude oil spot prices using monthly data for the past 20 years. The gasoline price that was utilized is the all-grades, all-formulations price reported by the EIA. The correlation coefficient between the two data series is 0.94 (1.00 would indicate perfect positive correlation). The R-squared statistic for the regression is 0.88, which in practical terms implies that 88% of the variation in the retail gasoline price is “explained” by changes in the crude oil price.

The second approach that was used was to regress the change in the retail gasoline price against the change in Brent crude spot prices. This was done since fuel prices often exhibit a trend over periods of time.

The results from the two approaches are similar. If the price of Brent crude were to rise to $95/bbl as a result of the OPEC+ production cut, the average retail gasoline price would be predicted to increase by $0.34-0.38 per gallon (gal) compared to the price shortly before the announcement. If it were to rise to $100/bbl, the gasoline price would be expected to increase by $0.44-0.50/gal.

EIA reports gasoline prices weekly rather than daily. However, AAA reported that the national average price for regular gasoline was $3.48/gal late last week. This is consistent with the $3.50/gal average price of regular gasoline reported by EIA for the week ended April 3. For both that week and the year to date, the differential between the all-grades, all-formulations price and the price of regular has averaged $0.11/gal. This implies that the all-grades, all-formulations price late last week would have been approximately $3.59/gal.

If Brent crude oil rises to $100/bbl due to the OPEC+ production cuts, as many analysts are predicting, the U.S. average retail gasoline price would be expected to increase to more than $4.00/gal. If the production cuts were to last for a year, that would equate to an additional cost to U.S. consumers of $64 billion, or nearly $500 per household.

According to a recent study conducted by energy economists from the University of California-Berkeley and the Czech Republic, the use of ethanol reduced the price paid by U.S. drivers for gasoline by an average of $0.77/gal between 2019 and 2022. That was based on ethanol being blended into gasoline predominantly at a 10% rate (E10).

Sales of a higher 15% ethanol blend (E15) have become increasingly popular over the last several years and hit 1 billion gallons for the first time in 2022. An RFA analysis found that the availability of additional E15 volumes saved American consumers approximately $60 million last summer, when it was $0.20-0.30/gallon less expensive than regular gasoline (E10). However, summertime sales would have been far smaller had the Biden administration not granted a series of waivers for E15 from an obsolete fuel requirement.

Whereas many retailers had previously found it difficult or impossible to offer E15 during the summer months in conventional gasoline areas, in 2019 the Environmental Protection Agency issued a regulation allowing E15 to be sold year-round.[1] Then, in 2021 the D.C. Circuit Court of Appeals vacated the regulation, ruling in favor of oil refiners. The restriction would have returned last year, but the EPA invoked its authority to issue emergency waivers when “extreme and unusual fuel or fuel additive supply circumstances exist,” as was the case following the Russian invasion of Ukraine.

If the administration does not take action within the next month, E15 sales will drop precipitously in most of the country this summer, as was the pattern in conventional gasoline areas prior to 2019. Yet, the issuance of waivers is at least as justified by market conditions now as it was last year, since inventories of gasoline (and petroleum overall) are even lower, as discussed above. Allowing E15 to continue to be sold in conventional gasoline areas this summer—just as it has the last four years—would benefit American consumers and the environment and strengthen energy security.

[1] EPA limits the volatility of gasoline during the “high ozone season” every summer (Jun. 1-Sep. 15). Prior to EPA’s 2019 rule change, the practical volatility limit for E10 sold in conventional gasoline areas was 10 pounds per square inch (psi) Reid vapor pressure (RVP), but E15 was held to a 9-psi limit. EPA’s 2019 rule effectively extended the volatility limit for E15 to 10 psi, creating regulatory parity for E15 and E10. READ MORE

ACE endorses congressional action to enable E15 sales year-round (Biofuels International)