The summer driving season kicks off this Memorial Day weekend and reflects not only the adventure-seeking spirit of most Americans, but also their mood about the economy.
The good news is that what we are seeing on the busy roads is signaling great things about the U.S. economy. The bad news is that U.S. refiners are struggling to keep up with the red-hot gasoline demand.
According to AAA, this long holiday weekend will see the second-highest travel volume on record, trailing only the high set in 2005. (AAA first began tracking national holiday travel volumes in 2000.) An additional 1.5 million people are expected to take to the nation’s roads, rails and runways compared with last year.
And it’s not just car travel that could keep the pressure on refiners. Another 3.25 million are expected to take to the skies, increasing air travel by 4.8 percent over last year, according to AAA.
The refiners have been building up supplies of those famous summer blends of gasoline to prepare. While the national average for gas prices this week sits at $2.84 a gallon, record demand and tight supply means there are risks that could still rocket higher.
U.S. refiners have their work cut out for them as a strong pre-holiday gasoline demand has left inventories 7 million barrels below year-ago levels. This is a concern because if refiners don’t keep up with the sizzling economy, gasoline prices will have to go up.
It is not like the refiners are not trying, but they have had a difficult time getting gasoline supply just back to the lower end of the average range this year. They have had to deal with OPEC production cuts that drove up crude prices for refiners, along with the loss of supply from one of their favorite exporters in Venezuela.
Recent Iran tensions have also added to the risk premium for oil. Risk premium is real and does impact prices. Because the risk of supply is high, insurance costs go up and that is tacked on to each barrel of oil that refineries must buy.
When it comes to gasoline, the cost of crude matters to you. About 56 percent of what you pay at the pump for a gallon of gasoline is tied to the cost of crude oil.
The U.S. energy industry has done its part by increasing production levels to 12.2 million barrels of oil a day -- and this is perhaps the only reason that gasoline prices are not much higher than they were a year ago. And while the risk of a price spike for gasoline remains high, a cooling down of tensions with Iran and recent crude supply increases have stabilized prices for now.
So even though we are seeing gas prices that are somewhat high, summer is here and the worst of the price spike might be over.
As I have said many times before, the best way to measure the health of the U.S. economy is sometimes in miles per gallon. So with gasoline demand being as strong as it is, it is showing us that the economy is humming along and consumers are ready to spend money on the open road.
Phil Flynn is senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at firstname.lastname@example.org.