Gas Prices Are Going Down. Has Anybody Noticed?

Experts increasingly say people just want to complain.

Moveable explores the future of transportation, infrastructure, energy, and cities.

You may have noticed recently that gas prices are going down. Since mid-June, the average retail gasoline price across the U.S. has declined from a peak of $5.11 per gallon to $4.88 as of July 4, according to the U.S. Energy Information Administration, a government agency. 

This is not because of anything politicians are doing. It is because oil prices have been falling from a peak of $122 a barrel on June 8 to a low of $98 a barrel yesterday, and gasoline prices are largely based on global oil prices, something politicians cannot and do not control or significantly influence.

But wait, you might be asking. Oil prices are down almost 20 percent but gas prices are only down by 4.5 percent? If one is based on the other, what gives?

The answer, as energy analysts so often like to say, is complicated. The U.S. is part of a global oil market, a complex refinery structure in which oil is on its way to be turned into various consumer products, a vast distribution network, and a web of wholesale distributors for gasoline before it ends up in your car. And all that complication is not well-served by a political landscape happy to turn gas prices into the wedge issue of the election season.

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To find out what’s going on with gas prices, I called up Patrick de Haan, head of petroleum analysis for GasBuddy. He’s been one of the most vocal experts on social media trying to explain what’s going on with gas prices. I was expecting to have a nerdy conversation about oil markets, refineries, distribution networks, and local gas retail dynamics. 

He was game for that, but he also sighed when I asked. He said we could talk about the rate at which gas prices rise and fall, but after spending months trying to correct misconceptions and provide the complicated, real answer to the general public on a pressing economic issue, he’s learned most people don’t want it. 

“That's very much the question here,” de Haan told Motherboard. “Do people really care enough to know what's going on?” He answered his own question. "I don’t think people really care, they don’t want to know. They’re just frustrated, they just want to vent about prices. They don’t care.”

De Haan said there are exceptions, and a small minority of people really do want to learn how gas prices work. If you’re one of those people, read on.

The conventional answer for why gas prices rise faster than they fall is an economic phenomenon often referred to as “rockets and feathers.” It refers to the pace at which retail prices increase when costs go up and decrease when they go back down. And with gas prices, study after study after study has shown that gas prices shoot up quickly with little delay when oil prices increase, like a rocket, but drift slowly back down when oil prices then begin to fall, like a feather. In more jargony terms, this phenomenon is also known as sticky prices of asymmetric prices, and it affects pork, fruit and vegetables, and banking rate markets, too.

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Take this year, for example. Crude oil prices spiked the last week in February, from a low of $91 a barrel to $123 by March 8. The average national gasoline price is presented with weekly data by EIA, but on February 21 gas prices averaged out to $3.46 per gallon. By March 14, they were $4.41, a percent change of 35 percent and 27 percent, respectively, almost in lock-step. That was the rocket. Meanwhile, on June 8 oil prices began falling, and gas prices did edge downward slightly starting the week of June 13, but as noticed above, it’s been a whole month and gas prices are only just now starting to get noticeably cheaper. 

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Why does this happen? A 2008 paper in the Journal of Industrial Economics used monthly gas and wholesale price data from 37 states from 1988 to 2002 and found “a link between gas station market power” and sticky prices. The higher the profit margins on a gallon of gas are—which indicates the gas station does not have a ton of competition—the slower gas stations will be to lower prices.

Basically, the thought is that when wholesale costs go up, gas stations pass that on to the consumers as it kicks in by raising prices immediately. When prices fall, they only lower them to slightly undercut the competition, a process that takes much longer.

But, Clark Williams-Derry, an energy finance analyst for the Institute for Energy Economics and Financial Analysis, isn’t totally buying it. He doesn’t dispute the rockets and feathers theory, but argues its effects are greatly exaggerated, colored by our own flawed observations. He told Motherboard, “When it comes to oil and gasoline, I tend to think it's as much a cognitive phenomenon as an economic one.”

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For one, comparing changes in oil prices directly to gasoline prices is flawed, because the infrastructure to refine, transport, and pump gasoline has its own costs that will be present even if oil is literally free. As a result, gas prices will usually “move” less than oil as a percentage, Williams-Derry noted.

Second, just because rockets and feathers exist doesn’t mean it’s especially meaningful. “The rockets/feathers effect can be hard to discern, and to the extent that it exists it doesn't seem to last that long,” Williams-Derry said. “I'm not saying that it doesn't exist! Just that when it does occur it seems like it's pretty temporary, on the order of a week or so.”  In other words, prices may take a bit longer to fall, but not by weeks or months.

Third, this particular period of gasoline price increases has as much to do with refinery capacity, known in the industry as crack spreads—seriously—as it does oil prices themselves. Specifically, “The Russian invasion, sanctions, and Europe's turn away from Russian oil, gasoline, and diesel has created something like chaos in the global oil refining industry,” Williams-Derry said. “This means that refineries are actually able to charge a LOT more than they used to, which is driving gasoline & diesel costs much higher than they'd been in the past.”

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Fourth, people generally pay way more attention to when gas prices are going up and a lot less when prices go down. They also pay almost zero attention to when gas stations or the oil industry is absorbing the costs of our cheap gas for various complicated financial reasons.

For example, de Haan said, when wholesale gas prices go up, retailers typically don’t raise their prices for two to five days as they work through existing inventory or wait to raise prices until nearby gas stations have to buy new inventory, too. During that time, the gas station owner is absorbing the cost of rising prices. And if prices go up for extended periods as they have for the last two years, gas stations are consistently absorbing losses. They don’t make that money back until prices start going down again.

It’s counterintuitive, de Haan acknowledged, but “stations hate rising prices as much as you, because they make money when prices are trending down, and not up.” 

Still, de Haan has spent enough time on Twitter in recent months to know few people will have sympathy for their local gasoline retailer or wholesale distributor.

“I don’t think people want to understand what drives prices,” de Haan said. “They just want to complain about them.”

Tagged:

Economy, Moveable , worldnews

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