Biden demands faster drop in gas prices as oil falls

“Oil prices go down, so should gas prices,” Biden said on Twitter. “The last time oil was $96 a barrel, gas was $3.62 a gallon. Now it’s $4.31. Oil and gas companies shouldn’t increase profits at the expense of American workers .”

The administration’s focus on the intricacies of energy prices shows the level of frustration inside the White House with one of the key drivers of high inflation.

Prices at the gas pump are falling, but only very gradually. The national average for regular gasoline fell to $4.31 a gallon on Wednesday, according to AAA. That’s down a penny from Tuesday and two pennies from Monday.
This is despite Brent oil crashing 28% between the March 6 intraday peak and Tuesday’s close.

“It just seems to take a long time”

It’s not new. The industry even has a nickname for this practice: Rockets and Feathers.

“It’s been going on for 40 years,” Andy Lipow, president of consulting firm Lipow Oil Associates, told CNN. “Prices are falling, it just seems to take a long time. You can’t deny the data that’s out there.”

Old or new, Biden is no fan, especially after witnessing this phenomenon last fall when gas prices slowly retreated after the administration released emergency oil reserves and Omicron struck. .

“Try to explain it’s all about rockets and feathers to President Biden, and you better be ready to hear ‘It’s a bunch of malarkeys’ coming your way,” a senior said. White House official at CNN. “The president is well within his rights to point out that if you’re going to have rockets going up, you need to have rockets going down, not feathers.”

But it may be unreasonable to say that prices at the pump should change instantly just because oil prices change. It takes time for price fluctuations to trickle down the supply chain.

Perhaps the owner of a gas station is selling fuel today that he purchased a few days earlier, when oil prices were much higher. (This is especially true in today’s extremely volatile market.)

“Don’t get me wrong. There would be some lag,” Lipow said. “What if I was the guy who just bought my tanker load yesterday and the crude oil fell the next two days?”

Tom Kloza, global head of energy analysis at the Oil Price Information Service, said gas stations had no choice but to pass the impact of higher oil prices on to the rise due to the pressure on their profit margins.

“And going down, it’s like, ‘We’ll be as patient as possible,'” Kloza said. “They will fall, but at a much slower rate.”

Joe Brusuelas, chief economist at consultancy RSM, noted that gasoline prices are a function of past purchases and expectations about the cost of future deliveries – and there is currently great uncertainty about the direction of gas prices. oil.

“The criticism of price-fixing at gas stations is somewhat misguided,” Bruseulas said.

$1,300 affected to households

There are real economic consequences here.

Every 10-cent increase in gas prices costs consumers at least $11 billion over the course of a year, according to Moody’s Analytics.

Gasoline prices have surged over the past year and a half, and as of the end of last week were about $1.50 per gallon higher than the 2019 average. If prices stay this high , consumers will pay $165 billion more in 2022 than in 2019, according to Moody’s Analytics.

Oil prices fell 30% in one week.  Which give?

Put another way: Average annual gasoline spending would increase by about $1,300 per US household, Moody’s told CNN.

The senior White House official suggested that gas station owners are not passing savings on to consumers as quickly as they could.

“It uses pricing power in a way that isn’t particularly fair from a consumer perspective,” the official told CNN.

GasBuddy’s Patrick De Haan said earlier this week that the gas price decline should accelerate if oil stays below $100 a barrel.

“Stations lost their shirts going up, but now the margins are improving and they’ll start passing the discounts on to you,” De Haan wrote on Twitter.

“Uneven” link between oil and gas prices

Of course, the oil industry was in dire straits just two years ago. Oil prices crashed, with US crude turning negative for the first time, driving gasoline prices down dramatically.

The National Association of Convenience Stores, a trade group that represents the retail fuel industry, acknowledged in a blog post Wednesday that retailers may not cut prices immediately after an oil rally “to offset the margin they lost when prices increased”.

“Everyday retailers don’t know where wholesale prices might be heading, so they try to recoup the lost margin as quickly as possible, because they don’t know if wholesale prices might go up and margins might get tighter. “, said the NACS. in the post.

The industry group also pointed out that a complicating factor is that the fuel industry is currently going through its government-mandated annual transition to summer fuel blends.

“Retailers want lower gas prices just as much as their customers do,” NACS said. “When prices are low, consumers have more disposable income to shop in-store. They are also happier, which is also good for business.”

The American Petroleum Institute, the trade group representing the oil and gas industry, said in a statement that retail prices in many industries are falling more slowly than they are rising.

“When it comes to gas prices, Americans are looking for solutions, not accusations,” said Frank Macchiarola, API’s senior vice president of policy, economics and regulatory affairs.

There is academic research that supports the White House argument.

The Federal Reserve Bank of St. Louis released a report in 2014 pointing out that there is an “uneven” relationship with the impact of oil prices on gasoline prices. This report was based on a review of academic work measuring the so-called transmission of oil and gasoline.

“When oil prices rise after being flat for some time, gasoline prices rise rapidly,” the Fed newspaper said. “In contrast, when oil prices fall after being flat for a while, gasoline prices slowly come back down.”

Who owns the gas?

Biden’s focus on this issue comes after House Democrats penned a letter last week urging congressional leaders to immediately investigate and hold hearings into “alleged price gouging in the oil industry and gas”.
Democrats have also introduced a Big Oil Windfalls profit tax that would aim to “stifle the profits” of oil companies.

Although gas stations often bear the logo of a major oil producer such as Exxon or Shell, they are often owned and operated by independent retailers. Gas station owners are allowed to represent this household brand.

For example, ExxonMobil (XOM) says it does not own or operate gas stations in the United States, even though there are countless Exxon and Mobil gas stations across the country. At the end of 2020, Exxon listed nearly 11,000 distribution sites in the United States.
According to the American Petroleum Institute, petroleum refiners own less than 5% of the nation’s roughly 150,000 retail gas stations. Many gas stations are owned by an individual or a family, while others are under the control of a corporation that owns hundreds of them.

Ultimately, Kloza said people who can wait to buy gas will benefit.

“If you can wait five days to fill up, you’ll get a lower price,” Kloza said.

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