Posted in: Gas Prices,
by Patrick DeHaan on May 18, 2012 01:00 PM
Many many times I receive questions from readers "why if crude oil prices have fallen to $XX are gasoline prices still high?" This is a top question I receive, and while the answer is somewhat complex, I'll try to make it as simple to understand as I can.
You see one, or maybe two types of crude oil and their price listed. Many times, the types are West Texas Intermediate crude oil, and Brent crude oil. The problem with this is that there are many different types of crude oil, each with their own price. Depending on a refinery's location, they may use an oil that many don't know about or follow the price. So while the price of one or two types of oil drops, one might drop more than the other. Bottom line is that every type of dozens of types of oil have their own price, and some days one oil might drop more or less than another. It's not always a safe assumption to think that because the price of one oil dropped big, they all did.
The second problem is that you don't fill up with oil. Yes, oil makes up a significant portion of gasoline, but there are other ingredients that can vary in price depending on their supply as well.
A third problem and perhaps most obvious is that gasoline is different from crude oil- it is refined, and supply of available gasoline is different than supply of available crude oil. There's a bottleneck here- the refinery. Depending on local situations, a refinery may be operating 100% or may have a problem and only operate at 50%. When demand for gasoline is at the current 8-9 million barrels per day, when one refinery suffers a problem, it can't make as much gasoline, which impacts supply. Supply, while still available, becomes tighter. This is economics 101. When supply drops, prices rise- especially for something as in demand as gasoline.
Regional refinery issues may or may not impact other regions depending on what type of gasoline the problematic refinery is producing. A refinery fire in California many times won't interrupt gas prices outside the West Coast because of the separation of the West Coast from the rest of the country. It also means that if there is a problem on the West Coast, prices will spike as little assistance is available from outside the region.
However, if there's a refinery problem in Indiana, product can generally be sent from the Gulf region via pipeline, helping to eventually ease the tightness in supply.
So why don't changes in oil prices immediately impact the market? First of all, stations may have gasoline they payed more for in their tanks. They are less willing to drop the price until they start getting rid of older expensive inventory. Prices go up very quickly, however, to help offset this situation- that is a station raising prices immediately after oil rises helps prices generally come down more quickly and smoother than they would have otherwise.
Pricing of gasoline is incredibly complex for the average motorist to understand, but hopefully this offers insight to this frequently asked question.