What Americans Don't Understand About Gas Prices

The gasoline supply chain is more complex than most people realize.

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Patrick DeHaan is a senior analyst at gasbuddy.com.

Americans are obsessed with oil prices. They see the price of oil quoted on their local news, the national news, in their newspaper, and online. Many attempt to tie the price of "the barrel" (which seems to be the term Americans call the unit that crude oil is priced) to the price on the corner gas station, an error that they can't seem to understand.

I typically get a few E-mails per day asking "Why are gas prices up if the barrel is down?" or "What's going on? The barrel went down today, why didn't gas go down today?" I give you one word to explain most or all of the sometimes-disconnect between crude oil prices and the price at the pump: Refining.

[See a collection of political cartoons on gas prices.]

You see, Americans, while you may be infatuated with oil and the price of it, you're not filling up with oil. Something that seems so simple is actually much more complex. There are inventories of crude oil and inventories of gasoline. They are different. What impacts the supply of one may not directly or immediately impact the supply of another.

Crude oil must be refined by one of the 100-plus refineries operating in the United States today, some of which lie in the Gulf region, some on the West Coast, some in the Great Lakes, and some on the East Coast. (Sure there are others, but for simplicity these are the major refining hubs.)

If a refinery in Chicago has supply issues or if traders perceive supply will tighten, prices of gasoline will rise even as crude prices fall. It's not normal, sure—its a temporary phenomena—but it occurs perhaps more often than you may think.

[See a collection of political cartoons on energy policy.]

Earlier this year, a major refinery fire in Washington broke out at a BP oil refinery. It caused major damage and caused the facility to shut down much of its production. While prices rose slightly, the difference wasn't huge, mainly because demand is the weakest in February. As warmer weather approached, more people starting driving more—getting their summer vehicles out, going on trips, etc. With BP's facility still shut a month ago, demand rose, sapping inventories. Prices rose, even as oil prices fell due to this situation. Not helping things was the change-over in gasoline specifications from winter to summer that resulted in even tighter supply. As BP came back up a week or two ago, wholesale prices have fallen sharply, even outpacing drops in oil prices, as the temporary (a long "temporary") issue was resolved. Gasoline prices have fallen more than oil on the West Coast. It's a two-way street.

Americans, there is no magic ratio that can accurately determine gasoline prices based on oil. The market determines prices based on demand, supply, things we call oil fundamentals. This isn't a hoax or conspiracy to get you to pay more, it's just reality, and sometimes we need a dose of it to help understand how things work, and that's the case here. I believe it is admirable that individuals want to learn about gasoline prices, but putting your faith in errant math simply does no one any good. So in the future, remember, while oil and gasoline have a strong relationship, it isn't always a directly proportionate relationship.

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