Patrick DeHaan is a senior petroleum analyst at gasbuddy.com.
The recent sell-off in oil futures has been surprising to say the least. Oil prices had managed to shed nearly 25 percent of their value in a week after falling from near $100/bbl to touching $76/bbl. With the dramatic decline in the price of oil, I'm receiving many comments and questions asking why gasoline prices haven't yet fallen significantly.
The main component in gasoline has seen a steep decline in price, but it really hasn't shown up at the pump. Why does it take so long for prices to drop, but it seems that prices rise much quicker? Your eyes or senses don't deceive you. It's true—prices do fall slower than they rise. Many times, stations make a better margin when the trend is downward, and they recoup losses and make more money by slowly dropping the prices instead of doing an all-at-once approach. They also have existing gasoline that they likely paid a much higher price for, and so as they slowly sell through it, they may elect to drop price knowing their next tank load will cost less. [See a collection of political cartoons on gas prices.]
Competition is also a key factor here. One station may have bought an 8,000 gallon load of gasoline the day before the decline started, in which case they'll be even slower to drop their price since they paid a higher price. If a station isn't as willing to be competitive, it stalls other stations from dropping further. Stations aren't in the business to lose money, so they tend to resist dropping price until someone else does. On the other hand, if a station did have things timed perfectly, they might have been able to buy a full load at the cheapest price, in which case they'll also drop their price, but at a similar slow pace to take advantage of the extra cents per gallon they can earn.
Having said all of that, people are also wondering why gasoline prices are so much higher this time around even though crude is in the $80-range and just last year, gasoline was nearly $1/gal less while crude was holding in the $80/bbl area.
So who's making out on that one? Most of the extra money at the pump is going to refineries. See, oil and gasoline have a strong relationship, but not a direct one. This means that while oil prices could hold steady, gasoline prices can fluctuate as supply and demand of gasoline changes. There are fundamentals at play here, oil and gasoline inventories are separate and can impact the price paid at the pump differently. It just so happens that this time around, gasoline inventories are slightly lower than last year. That has refineries coming out ahead. (So is this a conflict of interest? Refiners could manipulate the market by simply supplying less, yes.) [Check out U.S. News Weekly, now available on iPad.]
All in all, gasoline prices may continue to fall. The key questions are how long and how much? Well, at this writing oil prices have rebounded to $87/bbl. The national average could drop to $3.50 in the week ahead, but because of the recent rebound in oil, I don't see it lasting as long as even I initially thought. The volatility of oil is simply off the charts. Hold on for the ride!