Anyone wanting to delve into the mysteries of retail gasoline prices should look at Energy Information Administration’s (EIA) site, which is bulging with statistics and useful information.
A few days ago EIA posted a useful article explaining why the price of crude oil doesn’t seem to correlate with price at the gas pump. In short, here’s why:
There’s a time lag between refining crude oil and distributing it to retail sites — typically about two weeks, but it can be as long as four to eight weeks. Fluctuations in crude oil price during that timeframe can be significant.
Supply and consumer demand also play a role, and at any point in time, can work in the opposite direction of crude oil prices. So while the price of crude has an impact on retail prices, market factors can mitigate or reverse that impact.
This happened in January 2009, when retail gas prices increased during the first half of the month, while crude oil prices were falling. Given the time lag we discussed above, retail prices should be compared against late December’s crude oil price, which in fact, did increase.
What role do the refiners play in all this? Well, in December, some refiners were selling gasoline at prices less than the cost of crude they were purchasing at that time. They have contracts, however, that require them to produce gasoline regardless of profitability. But refiners change production based on perceived consumer demand, so this profitability gap adjusts over time. Toward the end of 2008, refiners reduced gasoline production, responding to signals from the consumer market. In addition to supply dropping, refinery maintenance in January contributed to the positive uptick on prices at the pump.
For more details, read the full text at http://tonto.eia.doe.gov/oog/info/twip/twiparch/090204/twipprint.html
