High pump prices the result of a suite of market issues and not simply price gouging, study says
Energize Weekly, May 18, 2002
Oil companies have been in the crosshairs of lawmakers for either price gouging or not producing enough oil as gasoline pump prices have soared, but a new federal bank analysis found that elements ranging from the weather to refinery outages play a big role in prices.
“While U.S. retail gasoline prices in many regions have remained stubbornly high since March, this situation reflects frictions in the retail gasoline market rather than the supply of oil or the price of oil,” the Federal Reserve Bank of Dallas analysis said.
Between the wellhead and the gas pump, oil flows through a complex supply chain with a variety of actors making market decisions.
Oil makes up 59 percent the cost of gasoline, but retail prices have not reflected the changes in that key ingredient. Refining accounts for 18 percent of the cost, distribution and marketing about 12 percent, and taxes another 12 percent.
Given crude oil’s share of the cost of gasoline, the analysis said, a 34 percent increase in the price of crude should translate to a 20 percent increase in retail gasoline prices and a 22 percent decline in the price should reflect a 13 percent drop in pump prices.
The wholesale price of gasoline has fluctuated with crude oil prices. The spot price on the New York Mercantile Exchange for blended gasoline rose and fell in the last few months with the price of West Texas Intermediate crude oil. Gasoline pump prices haven’t done the same.
“The response of U.S. pump prices has been highly asymmetric,” the bank analysis said. “While the price of retail gasoline cumulatively rose about as much as expected following Russia’s invasion of Ukraine, recent national retail gasoline prices dropped only 6 percent from the March peak, far less than the expected 13 percent.”
Independent oil and gas companies, without refining assets, produce 83 percent of all U.S. oil and about half the oil consumed in the nation. That oil is sold on competitive markets, and the refined oil products are sold on competitive markets, as well.
Gasoline and other fossil fuels are sent to more than 400 distribution facilities and then sold and delivered to retailers.
“Gas station operators set retail prices based on their expected acquisition cost for the next delivery of fuel from the local distributor, federal and state tax rates, and a markup that covers operating expenses, such as rent, delivery charges and credit card fees,” the study said.
U.S. oil producers own only 1 percent of the country’s service stations, so have little direct impact on pump prices.
The sluggish fall in retail gas prices could be the result of variety of factors – not involving price gouging, the study said.
Service station operators could be recapturing margins lost when wholesale prices rose rapidly and pump price increased more slowly.
“The reluctance to lower retail prices also likely reflects concerns that oil prices – and, hence, wholesale gasoline prices – may quickly rebound, eating into station profit margins,” the analysis said.
Consumer behavior may also be a factor. Motorists search more actively for lower pump prices as gasoline prices rise, but less actively as prices drop. This gives gas stations additional pricing power.
“This has prompted researchers to liken the response of gasoline prices to higher oil prices to a rocket – and the response to lower oil prices to a feather,” the study said.
The falling crude oil and wholesale gasoline prices also come as the weather warms and the demand for gasoline is rising, which would help support higher prices.
There have also been mark regional variations. Between February and March, the price of gasoline in Dallas increased 25 percent to $4.08 a gallon. During the same period, the price in Phoenix increased 22 percent to $4.63 a gallon.
As crude oil prices moderated, the price in Dallas dropped almost 12 percent to $3.60 a gallon, but the Phoenix price increased to $4.64 a gallon.
Phoenix is served by Southern California oil refineries, where an unexpected refinery outage in early March led to higher regional wholesale fuel prices just as prices elsewhere in the country started to fall.
“This suggests that price-reduction policies that treat all regions of the country the same are unlikely to be effective at curing the root causes of the asymmetry in the aggregate retail price response,” the report said.