Meltdown 101: Why Gas Prices Rise While Oil Drops

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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.

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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