Why Gasoline Prices Remain High Even as Crude Oil Prices Fall


When the price of crude oil hit new highs in early March with the Russian invasion of Ukraine, prices at the gas pump followed. They climbed 17% in just over a week.

But when crude prices fell — they’re now down more than 20% from their peak in March — pump prices fell somewhat but remained high.

This pattern is so common, especially with gas prices, that economists give it a pet name: rockets and feathers. When crude prices rise, prices at the pump tend to go up like a rocket. But when crude prices fall, prices at the pump tend to fall gently, like a feather.

This widely documented phenomenon helps explain why gasoline has remained stubbornly expensive even as crude gets cheaper, and why gas stations tend to pocket bigger profits when prices fall than when they rise.

Economists and policymakers offer a myriad of reasons for what fuels rockets and lightens feathers, from corporate greed to collusion, but the most powerful force may simply be consumer self-interest.

Drivers buy more cautiously — and force stations to compete — when prices rise, said Matthew Lewis, a Clemson economist and gas price expert.

When drivers stop at a gas station and see a higher price than expected, they think they can get a better price elsewhere, Lewis said. They don’t realize that West Texas Intermediate spot prices are driving up gas prices everywhere, so they’ll check prices at a few other stations before pumping.

But if that same person stops by and sees a lower price than expected, they’ll probably assume they’re getting a good deal — they have no idea that rough prices are falling even more than the price they’re paying. They pump the gas immediately, no research necessary.

This trend is confirmed by Lewis’ analysis of Internet traffic to the GasBuddy price comparison platform, published in the Journal of Industrial Economics. People flock to the site when prices go up but virtually ignore it when they go down.

With pump prices now at $4.15, nearly double their 2020 average of around $2.18 per gallon, and at all-time highs (before adjusting for inflation), Americans are exceptionally sensitive to price changes. When gas prices are much higher than what drivers have paid recently, drivers are more likely to reduce on driving and finding better prices, according to additional research by Lewis et al.

On the other side of the trade, resorts tend to make the bulk of their profits when prices drop like a feather. When prices skyrocket, station owners earn less and may lose money in the hypercompetitive environment created by expensive gasoline.

On average, stations enjoyed much higher profit margins in 2020 when prices were lower than in 2022, with prices reaching record highs. At the height of the pandemic shutdowns in 2020, customers weren’t buying much gas, but stations were pocketing 87 cents for every 2.07 gallons sold, according to data provided to the Washington Post by the Oil Price Information Service (OPIS). , a Dow Jones company. By the end of March, stations were charging $4.24 a gallon but earning only 36 cents on each gallon.

Many neighborhood stations buy gasoline in bulk once every three to five days, said Patrick De Haan, head of oil analysis at GasBuddy. When prices rise rapidly, the stations that fill their tanks first are hit by the high prices, but they cannot pass this on to customers because a competitor across the street may have a few days supply at the older price.

As a result, many stations are losing money on gasoline sales as prices rise. If they raised prices before their competitors, they would lose legions of newly price-conscious customers – customers who also walk into the convenience store and buy high-margin Slim Jims and energy drinks. It takes a few days for stations to pass on their higher costs, De Haan said.

“After about the third or fourth day, the stations start pushing the big increases forward,” De Haan said. “During that time, that means they’ve been underwater for 72 to 96 hours. The stations are therefore late. They lose their shirt.

Stations can offset these losses by being slow to lower prices at the pump as crude prices fall. And if prices drop enough, resorts can wreak havoc.

“The biggest myth is that retailers love it when the price goes up because they make so much money,” said Tom Kloza, global head of energy analytics at OPIS. “The reality is they love it when the price crashes.”

When crude prices fall, pump prices can be supported by “tacit collusion,” Clemson’s Lewis said. Sounds dodgy, but it’s a completely legal process in which station owners – without communicating with each other through any means other than the price signs above their pumps – independently realize that they will all benefit if prices remain high, so no one wants to be the first to lower them.

“Let’s be honest,” De Haan said, “petrol stations are a for-profit business. They are not looking to bankrupt themselves by losing money on the upside and then shoot themselves in the foot by dropping their price too quickly on the downside.

But if retailers don’t make money when prices rise, who does? Economists say that while refiners may see temporary benefits, they are being squeezed by the same forces that are crushing retailer profit margins. So ultimately it all comes down to the companies and countries that actually extract the oil.

“Anyone who produces oil is making tons of money right now,” said Severin Borenstein, an economist at the University of California, Berkeley, sponsor of the rocket and feather research. “That doesn’t mean the oil producers are doing anything anti-competitive,” he later clarified, “just that they are the lucky beneficiaries of a disrupted market that drives up the market price. well above their cost of production”.

When the oil industry is lucky and prices rise, executives reap the benefits, according to an Energy Journal analysis of payrolls at 78 U.S. energy companies by University of Michigan economist Catherine Hausman and UC Berkeley economist Lucas Davis.

Leaders tend to get substantial increases when oil prices rise, even though prices are generally determined by geopolitical forces and other factors beyond their control, Hausman said. And when prices fall, executive compensation does not.

Besides oil producers and executives, credit card companies could be the biggest beneficiaries of high oil prices, Kloza said. They take a percentage of whatever the customer pays at the pump, so their discount skyrockets along with gas prices, but they don’t have to invest additional time or resources in the transaction.

In a few weeks or months, gas prices will catch up with prices at the pump as gas stations drive down prices on each other in a slow and steady battle for customers. But even if crude prices fall, they remain relatively high in historical terms, making pump prices unlikely to fall to pre-pandemic levels in the near future, experts say.


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