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Page added on December 5, 2014
So Why Isn’t Gas Even Cheaper?
Economists call it the “rockets and feathers” phenomenon. Rockets zoom higher, but feathers float lower.
There’s pretty wide agreement that gasoline prices seem to rise quickly when oil spikes, but they don’t fall so quickly when crude crashes. There’s little consensus about why.
The latest data point comes with the recent plunge in global crude oil prices; West Texas Intermediate has fallen from a summer peak of about $102 to just above $66 on Thursday. That’s a 35.3 percent drop.
During the same period, the average price of a gallon of gasoline has fallen from $3.87 to $2.86—or just 24 percent. (Corrects percentage drop in gas prices.)
That lag in the price drop at the pump has a fairly simple explanation: The gasoline you buy today was made with crude oil bought when prices were higher. So it takes a while for the price savings to move through the supply chain.
Drivers call it “gasoline refiners and dealers getting greedy.”
What’s not so obvious is why prices seem to move faster to the upside when the price of crude oil rises. In technical terms, this is known as the “asymmetric, nonlinear pass-through of crude oil prices.”
Drivers call it “gasoline refiners and dealers getting greedy.”
Economists have studied the crude-gasoline price connection for decades. While they can’t agree on the causes, many studies seem to confirm that the asymmetry is real.
In 2010, a Federal Trade Commission study found that on average, retail pump prices rise more than four times as fast as they fall. The effect was more pronounced with branded gasoline than unbranded gas. And the “rockets and feathers” phenomenon was worse in Midwest cities than elsewhere in the U.S.
Different market forces
Researchers have sought to explain what’s going on—with mixed success. One reason the two prices don’t move in lockstep is that different market forces apply to crude and gasoline. Here’s a sampling of the answers researchers have come up with:
Competition: When gasoline prices are falling, some gas stations hold onto higher prices simply because they can. In locations where there are fewer stations competing for your business, there’s less pressure to cut prices, so they hold off as long as possible. That’s harder to do when prices are rising, cutting into already razor-thin profit margins. (Gasoline retailers typically make only a few pennies a gallon on gas, booking the bulk of their profits from the snacks and soda sold inside.)
Clueless consumers: Clemson University economist Matthew Lewis theorizes that prices seem to fall more slowly, in part, because drivers remember the last price they paid when they filled up. In spite of those 6-inch-high numerals on top of the pump, they may be slow to realize prices are falling prices until they go to refuel.
Location: Though price changes are usually tracked using national averages, the price you pay varies widely from one pump to the next. Taxes, transportation costs, local supplies, changes in commuting patterns can all act independently on gas prices, which can amplify the impact of crude price runups and crashes.
That’s why “it may not be surprising that we found more asymmetry at the local level than at the national level,” according to economists at the St. Louis Federal Reserve.
The weather: Price changes also vary widely with the season. In much of the country, refiners have to produce different blends for summer and winter months. Summer fuel is more expensive. “During the winter, the rate at which gas prices are pulled down by oil prices appeared to be higher than it was during the summer,” according to St Louis Fed researchers.
Taxes: When you top off your tank, you’re paying for more than just the cost of the gasoline. In states where taxes are high, that can be a big part of filling up. When gas prices rise, you pay extra for the gas, When they fall, you still pay the full tax, which are levied per gallon rather than per dollar. So taxes skew the ratio between the price of gasoline and crude oil, researchers at the Cleveland Federal Reserve have noted.
Global demand: Until relatively recently, gasoline refined in the U.S. was sold only in the U.S. Though still a small share of production, the volume of U.S. exports is rising as U.S. demand has shrunk. That’s helped cushion the downward price pressure from falling crude prices.
10 Comments on "So Why Isn’t Gas Even Cheaper?"
rockman on Fri, 5th Dec 2014 3:54 pm
In case folks don’t know the price of a gallon of gasoline is only partly a function of the price of oil. I won’t take up space explaining. If really interested just search “refinery costs” and “crack spread” to satisfy your curiosity.
But the short answer is that the folks who sell gasoline are just like the folks who sell everything else: they don’t base their sales prices on what it costs to produce the product but at the max they estimate they can sell enough of the product to generate the return they’re hoping for. IOW it doesn’t matter if oil were selling for $30/bbl and the refiners could sell gasoline for twice the profit margin they are today…they would.
Davy on Fri, 5th Dec 2014 4:16 pm
The price differential is $1.16/gal here in central Missouri between diesel ($3.60) and gas ($2.44). I need to do the calculations but I imagine my Toyota farm truck is as economical as my Jetta tdi that gets 42mpg. Someone is screwing someone. OH well, the Jetta is a great commuter car and the price of fuel is not an issues for me because I don’t drive that much.
poaecdotcom on Fri, 5th Dec 2014 4:45 pm
Falling oil prices is the first ripple of the deflation tsunami and all the talking head muppets are cheering. Like in 2008, when the tide goes out… you run.
Makati1 on Sat, 6th Dec 2014 5:26 am
poaecdotcom, you are correct. Not one person today has any idea what next December is going to be like. Not one of us. Only guesses. Oil could be $40 and all the pain that goes with it, or it could be $140 and all the pain that goes with that. Either way, I think we are in for a lot of pain in the near future. Maybe like Wyle Coyote when he finally hits the dirt.
Davy on Sat, 6th Dec 2014 6:44 am
We have plenty of ideas what is coming by next December. There is solid and quantifiable evidence of depletion in every vital resource area. We know human population is growing constantly day by day. How is that a guess? We definitely understand the direction. The issue here is distortions of facts. There is nothing pointing to us being blind to these facts there is only denial of the results or spinning the results to look good.
Perk Earl on Sat, 6th Dec 2014 10:42 am
Off topic but thought this latest news on Fed planning to raise rates in 2015 was noteworthy:
http://www.nasdaq.com/article/feds-mester-after-jobs-report-economy-improving-rate-hike-sometime-in-2015-20141205-00725
“I don’t want to react to one report. It is a strong report. But we’ve seen that trend,” Mester said at a conference in Washington.
“I don’t think we’re behind the curve,” she said of the Fed’s reluctance to raise interest rates.
“As the economy continues to improve, as we’ve seen, then I would think we would be raising rates sometime in 2015.”
Davy on Sat, 6th Dec 2014 11:04 am
I thought it interesting Bernanke said rates would not go up in his lifetime. That was said at one of his paid speaking tours months ago.
Perk, with the instability we are seeing in the HY markets my bet would be on no rate increases. These companies suffering from oil price drops will need restructuring help through low rates.
If the fed admits rates are not going up now they are admitting the economy is not improving. Fed fwd guidance will keep jawboning a rate hike because of perceived economic growth to keep confidence up.
Northwest Resident on Sat, 6th Dec 2014 11:22 am
Isn’t it becoming more clear with each passing day that BAU is running on fumes and will simply stop at some point in the near term future? The machine is breaking down in critical areas, and I mean seriously breaking down. All the lies and propaganda intended to manipulate the masses into doing their part to keep the broken machine staggering forward will stop working one of these days. Seems likely, to me, and sooner than any of us will be ready for.
Perk Earl on Sat, 6th Dec 2014 1:13 pm
“Perk, with the instability we are seeing in the HY markets my bet would be on no rate increases.”
Yeah Davy, maybe it’s just good PR for them to suggest it is possible to raise rates. I read an article last evening saying interest rates need to stay at or near zero permanently or the whole shebang detonates with defaults. So you are probably right, but who knows, maybe they will get brave in 2015 and try eeking it up only to retract their steps.
“All the lies and propaganda intended to manipulate the masses into doing their part to keep the broken machine staggering forward will stop working one of these days.”
NWR, yeah time is getting shorter alright. I’m still curious to see the reaction from corns when that moment arrives. “But, but we were so close to becoming energy independent. We had Russia on the ropes with low oil prices. Marcellus is mighty. How could this happen?”
They really won’t have a clue but I’m sure some other country will get blamed.
As we speak there are multiple protests that have been going on regarding police killings as you know and that’s even before all hell breaks loose. The whole country will look like a mix of post Katrina and Ferguson.
There was some footage on TV last evening of a convenient store, like a AM/PM or 7Eleven being ransacked by people in Ferguson. The lighting was dim and it was very eery, but the speed with which people were moving and grabbing stuff astounding. I didn’t know people could move that fast in unison stealing things on a mass scale like that. Maybe a preview of things to come.
Perk Earl on Sat, 6th Dec 2014 1:21 pm
Found this article posted by someone over at Ron’s site. When Norway starts backing off of drilling we know we’re in trouble. Like I’ve mentioned these low oil prices put more reliance on existing conventional, putting at risk future supply.
http://www.reuters.com/article/2014/12/05/statoil-rigs-idAFL6N0TP1DT20141205
Norway’s Statoil extends rig suspensions as margins squeezed
Norwegian energy firm Statoil extended the suspension of three drilling rigs on Friday as it battles to cut costs in the face of shrinking margins, squeezed by a 35 percent drop in crude oil prices since June.
Statoil, which had suspended more than a third of its exploration fleet this year, is upping its efforts to preserve cash having already been selling assets to pay for investments and dividends even when oil was over $100 per barrel.