10-9-08 by dugan
When oil prices dropped to under $78 a barrel today, I asked our friend Insider to take a look at why gasoline prices are going down so much more slowly than the price of crude oil. After all, since its peak in July of $145 a barrel, crude oil is down more than 45%. Gasoline, at $3.35 a gallon on average, is down a mere 18% from its high of $4.11 a gallon. I asked our friend Insider to take a look at this obvious ripoff. What he found is that the difference is going to oil company profits. And a bigger shock, the drop in economically essential diesel fuel is even less. Why? Because it’s harder for businesses to cut back on diesel than for drivers to cut back on gasoline. Here’s how he put it:
Consumers can expect to see the price of oil to continue to decline as the realization grows that a major worldwide recession, if not a depression, is underway. However, a large portion of the lower cost of crude oil is unlikely to reach the consumer if oil companies keep refusing to pass on the full decline to consumers at the gas pump, the diesel pump and heating oil deliveries. Currently, crude oil’s price declines are much steeper than the drop in all fuels. The difference is going straight to oil companies and other refiners as increased profit margin.
Yet diesel and heating oil are even more directly related than gasoline to the health of the economy and the price of goods we buy.
The most visible oil product is gasoline, and it’s the one everyone talks about. But the declines in diesel and heating oil prices have lagged way behind gasoline, even though all come from the same barrel of oil processed in the same refinery on the same day. Diesel and home heating oil are very similar products, and together these “middle distillates” (in refinery lingo) operate heavy duty diesel engines, produce electricity and heat homes and businesses.
Drivers, of course, have some flexibility in how much they drive and what they drive, which is driving down gasoline consumption. But when it comes to diesel fuel and heating oil, cutting consumption means stopping production in the mill, leaving crops in the field to rot, or eating breakfast in a parka during winter.
Because it’s harder to cut consumption of these products, oil companies know they can get away with charging more for diesel and heating oil—even though they’re less expensive to make than gasoline, and come out of the very same barrel of crude oil.
To demand that Congress regulate oil markets and refineries, which is the only way to get wild price volatility under control, click here and send a free message about what you’re paying for fuel, and what Congress should do to fix it.