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Here’s why a 60% drop in US crude oil prices resulted in a 33% drop in gas prices

Here’s why a 60% drop in US crude oil prices resulted in a 33% drop in gas prices thumbnail

Crude oil prices have dropped dramatically since last summer. Strangely, over the same time period, gasoline prices have fallen much less.

If a barrel of oil today costs less than half what it did last summer, why hasn’t the price people pay at the pump decreased a similar amount?

Sweet or sour?

It’s tough to say exactly how much the price of crude oil has fallen because there are many varieties, from light to heavy and sweet to sour. Prices vary widely based on the oil’s location and quality.

Crude oil is named for where it was pumped out of the ground. US news reports focus on West Texas oil, not because it is currently plentiful, but because the market for this type of oil has existed for many decades. European news often reports the price of Brent oil, from the North Sea, for the same reason.

From mid-June 2014 to mid-March 2015 West Texas Intermediate fell from $107 to below $44, a drop of almost 60%, while Brent oil declined from $114 to $52, a reduction of more than 50%.

It’s also tough to say exactly how much the price of gasoline has fallen because there are many formulations, types and grades of gasoline and petrol, but we can use the average. Last June, the average gas station in the US was selling a gallon of regular unleaded gasoline for about $3.65. The average price in mid-March was $2.45, a drop of just 33%.

In the United Kingdom, the price of super 95 petrol went from £1.30 a liter ($7.33/gallon) in mid-June to £1.11 in mid-March ($6.24/gallon), a decline of only 15%. In both countriexs gasoline prices have fallen far less than crude prices.

Greedy oil execs to blame?

What goes into a gallon of gas.(EIA)

I have heard numerous callers on radio talk shows state the reason prices are not falling is because oil company executives are greedy and are profiting at regular people’s expense. There is some evidence in both the US and Europe that retail gasoline prices go up much faster than they go down, but not all researchers agree.

The US evidence suggests 75% of a crude oil price increase is passed along to customers within four weeks, but it takes eight weeks for the same amount of a decline in prices to show up at the pump (see figure III here). So it appears there is some greed involved. However, since crude oil prices began dropping eight months ago, even if decreases take longer to occur than increases, enough time has passed that pricing lags cannot be the explanation.

The real reason is much less sinister. Crude oil only comprises a portion of the cost that goes into making a gallon or liter of gasoline. In the US, slightly more than half of the pump price is affected by crude prices. Federal, state, local and city taxes make up about 20% of the price of gasoline.

Distribution, which involves moving the gasoline from the refiner to your local station, plus marketing, or the ads that convince you to buy brand name gasoline instead of generic, comprise another 20% of the price.

Finally, refining, which turns the crude into gasoline, makes up about 6% of the price of gasoline. Taxes, distribution, marketing and refining are all components of gasoline’s price that do not depend on the current price of crude oil, and together add up to almost half of the price.

Higher taxes elsewhere

Outside the US, taxes comprise an even larger percentage of gasoline’s selling price. Canadian drivers see almost 40% of their gasoline spending go toward taxes. Japanese drivers pay about half; French, German, and Italian drivers pay about two-thirds; and British drivers pay more than 70% of total petrol cost on taxes.

How much is this? Drivers in the United Kingdom who are paying around £1.11 per liter for petrol actually pay just £0.35 for the oil. The remaining £0.76 per liter is for taxes.

Most countries have at least some gasoline taxes that are a fixed amount per gallon or liter. For example, the US federal government charges drivers a fixed 18.4 cents per gallon purchased to fund highway construction and repair. These fixed taxes mean that as crude oil prices fall, the amount taxes comprise of the final purchase price steadily rises.

A drop in the bucket

Because so much of the price at the pump is not affected by crude oil prices, when they fall the consumer sees only a portion of the drop. In countries like the US, crude oil currently comprises half of gasoline’s costs. This means if crude oil drops another 50% the customer will only see an additional 25% drop in price.

For countries, like the UK, where crude oil currently comprises less than one-quarter of gasoline’s costs, a 50% drop in crude prices means customers will see less than a 12.5% drop in price.

The supply of oil, especially from new US fields, is rapidly increasing. Demand in Europe and China appears to be slowing.

No matter what happens to supply and demand, even if crude oil prices fall to almost zero, all of us will still be paying a fair amount to fill up our cars and trucks because the cost of crude comprises only a portion of the price paid at the pump.


15 Comments on "Here’s why a 60% drop in US crude oil prices resulted in a 33% drop in gas prices"

  1. jim pomante on Wed, 1st Apr 2015 9:48 am 

    No matter how you explain it, all I see is that there is GREED somewhere and we as consumers get screwed, local stations around me take 2 weeks to drop prices 10 cents but then raise it that same 10 cents in a couple days.

  2. Plantagenet on Wed, 1st Apr 2015 10:33 am 

    Thanks to the oil glut, gasoline is now cheaper then imported bottled water. Consumers are saving hundreds of dollars per year thanks to the current low oil prices.

  3. steve on Wed, 1st Apr 2015 10:53 am 

    And there will probably be an “oil glut” for sometime as the economic gets worse…Yellen’s last comments about people hoarding cash has me worried. Is she an idiot or just playing dumb? She has to know that QE is just giving money to the banks to loan to the masses who have nothing but more debt…I think there needs to more discussion and focus on the financial aspect of oil rather than the geological aspect as we are going to hit that wall first! Raising interest rates will kill what growth is left is sounds like they are children trying to figure out a problem saying “well that button didn’t work lets push this button”. Is it really that bad?! I am afraid so. Amazing they have been able to dupe the masses for so long…keep taking that Soma!

  4. Davy on Wed, 1st Apr 2015 11:22 am 

    Agreed Steve, the systematic and economic are going to influence POD more than geologic it appears at least in the next 2 years. This racket called the global ecomply is one bad move by TPTB away from panic mode. Once panic mode has started who knows where the floor is now that ALL fundamentals have been destroyed.

  5. steve on Wed, 1st Apr 2015 1:07 pm 

    2 years…yes I think it is that close…I have heard estimates as far out as 10 years but I think that is way overly optimistic. Has anyone heard of the ECB giving cash to the people and circumventing the banks?

  6. rocky on Wed, 1st Apr 2015 1:38 pm 

    how many times has Big Oil blamed price hikes – which happen in a matter of days – on the cost of crude? then when the price of crude falls, it takes weeks to drop the same amount at the pump?? or they claim a refinery “accident” and suddenly the price jumps 20 cents in a week… yet those “accidents” never happen when the price of gas is high! or they blame the price hikes on refiners?? there is so much collusion and greed and dishonesty by these people, it’s obvious, all they want to do is rape our wallets. taxes are the same whether gas is $2 a gallon or $4, so if you deduct taxes from the prices, the change in crude prices should be reflected proportionally in what’s left. it’s not.

  7. William on Wed, 1st Apr 2015 4:01 pm 

    It takes gasoline a month to go up when oil prices rise? Not around here in NW Indiana. Gas prices go up within hours and not by 10 cents/gallon. More like 30 to 50 cents/gallon.

  8. Nony on Wed, 1st Apr 2015 4:34 pm 

    gasoline price hinges off of the world price for crude, not the US price for crude. There is an 8 dollar split of WTI and Brent. (Yes the import restriction DOES have an impact.)

  9. Wayne A. Biszick on Wed, 1st Apr 2015 6:09 pm 

    When a person or business is bleeding money there are many courses of action available to them. Most very unsavory to many people. To me the handwriting is on the wall. The day of HUGE profits from oil are nearing an end.
    When we went from horses to oil, we had much the same situation for those invested in horses. Either move the money to cars or go down with the ship. In the case of oil I would suggest that perhaps they might want to investigate Hydrogen on Demand, HOD, as an energy source to replace oil usage in combustion engines. See US Patent # 4,528,947. Notice that patent papers include the patent numbers of the inventions that led up to the current one. Why should this one not be the one that led to the solution appropriate for today?

  10. Peter on Wed, 1st Apr 2015 6:55 pm 

    How can they do this with an efficient market? It’s because all of the people complaining on this site still refuse to move to the bad neighborhood near their work or downgrade to a small sedan.

  11. Gary on Wed, 1st Apr 2015 7:16 pm 

    peakoil? That never happened.

    The US evidence suggests 75% of a crude oil price increase is passed along to customers within four weeks. FALSE. When oil spikes you will see the increase at the pump the next day to a week later.
    What about the hidden tax? Oil speculation.

  12. Poordogabone on Wed, 1st Apr 2015 9:18 pm 

    Price of oil affects prices of gasoline and also everything else, especially food. Has anyone noticed any food price going down? No, at best it does not go up as fast. So yeah, greed is certainly a factor from the food producers to the stores/super markets.

  13. Karol on Wed, 1st Apr 2015 10:21 pm 

    Excellent way of explaining, and nice post to get information about my presentation focus, which i am going to convey in school.

  14. rockman on Thu, 2nd Apr 2015 7:11 am 

    Just a reminder of a very basic fact: a business, any business, can offer its products at any price it chooses. ExxonMobil isn’t obligated to justify what it offers to sell a gallon of gasoline for to anyone. Just like any other business selling a common commodity XOM is controlled by the competition in the market place.

    It’s real simple: you don’t like what price is posted at the station just go to another one. The Shell Oil station at my office typically sells for $.30+ per gallon more then another Shell station close to my home. The higher priced station doesn’t have to justify its posting to anyone. What they decide to charge is no one’s business… no “justification” required.

    The “nanny state” is run by the govt…not the business community. Get over it. LOL.

  15. marmico on Thu, 2nd Apr 2015 7:44 am 

    Excellent way of explaining

    Any analysis of the relationship of the price oil to the price of gasoline which doesn’t discuss the crack spread is far from excellent.

    East Coast, Gulf Coast and West Coast motorists should blame the refineries as the crack spread has ballooned above its 5 year average and range earlier this year. Mid Continent motorists have been overpaying for the crack relative to other regions for years.

    See page 5 here.

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