Refinery Snafu Puts Speed Bump in Path to $2 Gas

An unexpected shutdown of the Midwest’s largest petroleum refinery has slowed the race to $2 gasoline, even with oil trading at its lowest level in over six years.

BP’s (NYSE:BP) refinery in Whiting, Indiana, had to reduce production by more than half to conduct repairs that may take a month to complete. The disruption on Aug. 8 caused retail gas prices in the Midwest to spike, while neighboring states in the central U.S. are beginning to see some effects as well.

The average price of regular gasoline in the Midwest region—known as PADD 2—jumped 32 cents a gallon to $2.79 from Aug. 10-17, according to the U.S. Energy Information Administration. That reflects the biggest weekly increase in PADD 2 since the aftermath of Hurricane Katrina in 2005.

Michael Green, a spokesman for AAA, said Indiana’s 59-cent gain versus last week is the largest increase on record. Meanwhile, Illinois gas prices rose 56 cents a gallon, and Michigan’s average climbed 51 cents. Ohio and Wisconsin drivers are paying an average of 44 cents and 39 cents a gallon more, respectively.

Likewise, the national average for a gallon of gas came in Tuesday at $2.66, about 9 cents more than a week ago.

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“It’s a crazy situation for drivers, and it has come at the worst time of the year,” Green said, referring to the busy summer driving season.

The BP refinery snafu was enough to insulate the Midwest from falling crude oil prices. Nymex West Texas Intermediate futures settled at $41.87 a barrel, the lowest mark since March 2009. Prices rebounded slightly to $42.10 by Tuesday morning.

Upward pressure on gas prices is normally contained when refinery maintenance is to blame, so drivers in other regions continue to benefit from oil’s descent

Some gas stations in South Carolina, Alabama, Tennessee, Louisiana and Virginia are selling regular gas for less than $2 a gallon Tuesday, according to GasBuddy. Other states like Texas and New Jersey are not far behind.

AAA data shows that South Carolina has the lowest average of all 50 states at just below $2.18 a gallon.

“I’m not sure if we’ve ever seen gas prices vary as dramatically as we see today,” Green said, adding that California supply disruptions have distorted the national average for much of the year. “Gas remains very cheap in areas where refineries are running smoothly.”

Midwestern drivers should see gas prices resume their decline in the fall when those refining issues are resolved.

Exxon Mobil’s (NYSE:XOM) Torrance Refinery, which accounts for at least 8% of refining capacity in California, has been dormant since a February explosion. Although repairs continue, Exxon recently filed an application to restart production using older equipment as soon as September.

As for BP, analysts expect the Whiting facility to have limited capacity for one to two months.

Green said the BP Whiting shutdown will “act as a speed bump. It will slow down, not stop the decline of gas prices across the country.”

AAA’s long-term outlook remains the same. Many areas will be under the $2 mark by Christmas, according to the travel group, and the national average should be close to that milestone, too.