The “Why” Behind Decoupled Oil and Gas Prices

Gas Still Expensive Though Oil Prices Are Down

After hitting a 14 year high in March, oil prices have dropped about 19%. Consumers who expected to see similar price reductions at the gas pump have been sorely disappointed.

The average cost of a gallon of gas is currently about $4.10, only 5.4% lower than its March peak. This leaves some confused and unhappy while refueling. During a Congressional hearing earlier this month, some Democrats blamed Big Oil, claiming energy companies are to blame for the high price of gasoline. Oil companies routinely deny these allegations.

A Complex Network

The system that determines the price of gas is complex and involves many independent players that all participate in a far-reaching network. About 9,000 independent operators drill for oil, which is then typically sold to large oil companies or refiners that turn it into gasoline. The US has 129 refiners.

The fuel is then delivered to more than 130,000 US gas stations. Although many of these stations are plastered with some of Big Oil’s logos, the vast majority are in fact independent operators who have paid for the rights to display those brand names. Large oil companies typically only own about 5% of US gas stations.

Slow to Change

Fuel prices are largely set by mom-and-pop businesses. Big box stores that sell gasoline such as Costco (COST) and Kroger (KR) also play a role.

Gasoline is a low-margin business, which makes timing price changes a tricky gamble for station owners, particularly when oil prices are so volatile. Some take a wait-and-see approach in order to avoid missing out on profits if prices are set too low, or sending customers elsewhere if they’re too high. Increased oil production will push oil prices lower, but it’s likely the cost of gas will be slow to follow.

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