What's Behind The Rise In Gas Prices?

Gas prices are on the rise and there's a slew of possible reasons as to why. Tensions with Iran, the Obama administration's policies, and Wall Street speculators have all been cited as factors. But it still doesn't answer why prices are increasing while U.S. demand for gasoline is going down. Weekends on All Things Considered host Guy Raz talks with NPR's John Ydstie about some hidden factors behind the jacked up gas prices.

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GUY RAZ, HOST:

It's WEEKENDS on ALL THINGS CONSIDERED from NPR News. I'm Guy Raz.

In a few moments, an update from Afghanistan on the killing of two U.S. military offices shot dead inside the Interior Ministry in Kabul. And later, former Italian prime minister, Silvio Berlusconi, escapes jail time once again.

But back to our cover story today, there's a lot of confusion over why gas prices have suddenly spiked. As we mentioned earlier, domestic production of oil is at an eight-year high, and demand for gas is at its lowest in over a decade. But the national average for a gallon of unleaded is now $3.60.

NPR's economics correspondent John Ydstie is here to explain. John, it's great to have you here. Thanks for being here.

JOHN YDSTIE, BYLINE: Nice to be here, Guy.

RAZ: OK. So some of the arguments that analysts are raising are as follows: Iran, instability with what's going on in the Middle East, Wall Street speculators, and then some people are pointing to the Obama administration's policies on drilling, on things like rejecting the Keystone XL pipeline that we've just been hearing about. Is that true? Is that why gas prices are going up?

YDSTIE: Well, some of those reasons, I think, are true. But those aren't the only things. There are some other big things going on. For instance, a number of companies - Sunoco, Conoco, Hess - have all shut down refineries in the U.S., cutting off 5 percent of U.S. gasoline production.

And the big reason is that these refineries are outmoded and unprofitable. They're old refineries. They haven't been updated to refine high-sulfur crude oil. So they can't compete with the other refineries that can. So there's a shortage of gasoline. Interestingly, there's not a shortage of crude oil. It's...

RAZ: Well, this is so fascinating. And tomorrow in the program, we're going to be talking about all the crude oil that's stored in Cushing, Oklahoma. There is a lot of crude oil in the United States, and yet demand is going down and prices are going up. I mean, usually when you study economics, it's prices go up when demand goes up.

YDSTIE: That's right. But in this case, what's happened is that the U.S., for the first time in six decades, 60 years, since before you were born, has become a net exporter of gasoline. We're sending more gasoline out than we're bringing in. And it's because the price of gasoline relative to the rest of the world is much lower. We're paying higher prices. But the cost of producing gas in the United States is so much lower that the U.S. is now a net exporter of gasoline.

RAZ: So wouldn't it make sense to keep more of that gasoline in the United States, not export as much and try to keep prices lower here? Is that possible?

YDSTIE: Well, it's not really possible because it's a free market. But the question is: So why is it so much cheaper for U.S. refiners to produce gasoline?

RAZ: Right.

YDSTIE: And the answer to that question opens the door to the most important long-term story here, even more important than the price Americans are paying at the pump today.

The reason U.S. companies can produce gasoline so cheaply is because we've got this huge amount of natural gas that's been developed over the last three years because of these controversial techniques by fracking.

RAZ: By fracking, yeah.

YDSTIE: And so there's this abundance of cheap fuel that U.S. refiners can use to crack crude oil into gasoline. And so the rest of the world sees this, they want our gasoline. They're bidding up the price, and we're paying a bigger price at the pump.

And, Guy, you know, oil refiners are just one example of the manufacturers in the U.S. who are being made more globally competitive because they have access to cheap and abundant natural gas to run their factories. So it's a big deal for the whole economy.

RAZ: That's NPR economics correspondent John Ydstie. John, thanks so much for the explanation.

YDSTIE: You're welcome.

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