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Here’s why gas prices are hitting record highs even as crude oil has fallen

Gas station prices
A sign showing gas prices at a station in San Diego, California, on November 9, 2021.

  • Gas prices and oil prices have moved asymmetrically recently, with gas hitting record highs while crude has retreated. 
  • Economists from the Dallas Fed argue that big oil companies hold little sway over retail prices at gas stations. 
  • Here’s why prices at the pump are not in sync with benchmark crude oil prices. 

Gasoline and oil have moved asymmetrically recently, with prices at the pump soaring to a new record even as crude has come off its multiyear high.

On Wednesday, the average gallon of gas in the US hit $4.40, according to AAA. Meanwhile, the cost of West Texas Intermediate crude surged in March to $123 a barrel, the highest since 2014, but has since fallen back to around $106.  

Given that 59% of gas prices come from the cost of crude, a 22% decline in oil should’ve translated to a 13% dip at the pump — but that didn’t happen, according to economists at the Dallas Federal Reserve in a Tuesday report

This disconnect, stems not from the crude oil market, but instead reflects frictions in the gasoline market, wrote senior economist Garrett Golding and senior economic policy advisor Lutz Kilian of the Dallas Fed. While lawmakers have called for probes into price gouging, oil companies have little direct control over retail prices because they own just 1% of US gas stations, the report said. 

Gas prices staying persistently high, the economists say, is likely due to trends in the retail sector. The report lists possible reasons for the asymmetrical moves: 

  • Gas stations could be moving to recapture “margins lost during the upswing, when gas stations were initially slow to increase pump prices.”
  • The hesitation to lower retail gas prices could come from concerns that oil prices may still rebound higher. 
  • Consumers tend to search for cheaper gas more intensively as prices rise than when they fall, providing more pricing power to gas stations and causing prices to fall more slowly than when they rose.
  • Warmer weather tends to increase demand, boosting retail prices.

And don’t expect an increase in US oil supplies to come to the rescue.

“Even under the most optimistic view, US production increases would likely add only a few hundred thousand barrels per day above current forecasts,” the Dallas Fed economists wrote. “This amounts to a proverbial drop in the bucket in the 100-million-barrel-per-day global oil market, especially relative to a looming reduction in Russian oil exports due to war-related sanctions that could easily reach 3 million barrels per day.”

Read the original article on Business Insider

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