Meltdown 101: Why Gas Prices Rise While Oil Drops
HOUSTON, TX — You may do a double-take as you pass your local gas
station. Chances are, the price you pay at the pump has jumped markedly
in the past couple of weeks, even as crude prices have fallen.
The average national price for a gallon of unleaded gasoline rose
seven-tenths of a cent overnight to $1.799 — well below the $3.05
average of a year ago but up nearly 14 cents in the past month,
according to the auto club AAA, the Oil Price Information Service and
Wright Express, a company that tracks transportation data.
At the same time, the price of crude — which accounts for about 60
percent of gasoline’s cost — has been on a steep decline. Oil futures
tumbled below $34 a barrel Thursday after trading as high as $50 a
barrel just 10 days ago.
So what gives? When oil made its extraordinary fall in recent months
from a record high above $147 a barrel in July, gasoline followed suit.
Why not now?
Here are some questions and answers about the connections between oil and gasoline prices.
Q: Why aren’t gas prices falling at my local service station right now?
A: While oil and gasoline prices very often move in the same direction,
there’s usually a lag between crude’s decline (or rise) and that of
gasoline. Analysts say the ongoing uptick is gasoline prices is likely
tied to oil’s sharp rise at the end of last year, when fighting between
Israel and Palestinian militants raised concerns about supply
disruptions in the oil-rich Middle East.
Q: If that’s the case, now that oil has retreated to below $40, shouldn’t gasoline get cheaper?
A: It should — and it might — but other factors are at play.
For one, the companies that process crude into products such as
gasoline are sharply cutting production, in part because demand has
fallen off so much. Less production means less supply, which tends to
push prices up.
The gasoline producers are trying to make some money in the wake of a
dismal 2008. When crude prices were so high in the first half of last
year, refining margins — the difference between what refiners pay for
crude and what they get for products they make from oil — were dismal.
In the latter half of the year, margins improved as oil prices receded,
but refiners continued to struggle because people were simply driving
less and buying less gasoline.
Companies that refine oil are publicly traded. If they don’t turn a profit, they won’t be around long.
"Refiners are not going to continue to sell gasoline at a discount to
crude oil," said Ben Brockwell, director of data, pricing and
information services for the Oil Price Information Service. "It simply
hasn’t paid to produce gasoline."
Q: But doesn’t that mean they’re simply inflating the price of gasoline?
A: That’s the opinion of the nonprofit group Consumer Watchdog, which
tracks the industry closely and has consistently called for greater
regulation of refineries.
Consumer Watchdog says production cuts at refineries in California, for
example, have far exceeded the state’s drop in consumption.
"The refinery cutbacks are for purely financial reasons," said Judy
Dugan, the organization’s research director. "Now is the time for
government to insert sharper oversight and regulatory controls of the
refining industry."
Q: How does my local station set gas prices? Does it follow orders from
corporate headquarters to keep prices as high as possible?
A: One thing many people don’t realize is that major oil companies own
fewer than 5 percent of gas stations. Exxon Mobil Corp., for example,
said last June it was getting out of the retail gasoline business,
following other major oil companies who’ve been selling the low-margin
businesses to gasoline distributors.
Most stations are owned by small retailers — and many say they took a
beating last year when crude prices spiked because they were unable to
raise pump prices fast enough to keep pace.
That’s exactly why some stations raised prices quickly after oil
futures jumped late last year: Not because the more expensive oil had
made its way through the production process, but because they saw an
opportunity to make some money after struggling with paltry profits for
months. So the usual lag between oil and gas prices may not have
occurred this time around at some stations — they wanted to raise
prices, and they didn’t feel like waiting.
Gas station owners face a balancing act: They must try to maintain a
price that allows them to afford the next shipment of gasoline, but
they’re also trying not to give the competition an edge.
Quinn Cassidy, an independent gasoline retailer in Slidell, La., said
his profit margin on a gallon of gasoline has improved significantly
since the summer, when he and others sometimes made pennies per gallon.
Now, because of crude’s descent, he says he can make 25 cents to 30
cents a gallon — and he makes no apologies for trying to keep the price
as high as possible while remaining competitive.
"Why isn’t it OK for me to make money?" Cassidy said.
Q: Are gas prices going to go up even more this summer?
A: Probably, but how much depends on whose forecast you use. Remember
that summer is driving season, and gasoline prices always climb when
thousands of people begin to take sun-inspired road trips.
Tom Kloza, chief oil analyst at the Oil Price Information Service,
predicts prices will move sideways over the next few weeks before they
begin to climb in the spring, reaching $2 to $2.50 a gallon. He said he
doubts prices can get much higher than that given how weak the economy
is.
In another forecast, the U.S Energy Department has said gasoline prices will likely average $2.37 a gallon through 2009.