Tuesday, January 27, 2015

Economy: Why Gasoline Is Still Expensive

(Drivebycuriosity) - There is a lot ado about the falling oil prices. And if we believe the media energy is cheap now. Yes, the price for oil (Brent Crude) dropped almost 60% since last summer. But the average price at the US pumps fell just 39% (bespoke). And the New York Times reports that gas is, "still not as cheap as It used to be" (nytimes). From 1986 until 2000 the gas price fluctuated below $2.

I think there are at least 4 reasons for the stubbornly expensive gas:

1. The oil price is represented by futures on oil - like the future for Brent Crude. These are contracts to deliver oil in the future and are traded on financial markets. The price for physical unprocessed - crude - oil (spot price) maybe be close to the price of the representing future, but it needs time to transport crude oil to the refineries where it gets processed into gasoline and other oil products. More time is needed to transport the gasoline to the gas stations all over the nation.

2. There is a kind of ratchet effect. Refineries and gas station owners (often parts of vertical integrated oil companies) are happy to hike their prices when the market price goes up. But they are reluctant to reduce prices (like every producer) because they enjoy the higher profit margins. Over time competition usually forces them to adapt their prices, but that could need months.

3. In the winter season, when there is less demand, many refineries are temporary shut down for maintenance. This reduces temporary the supply of gasoline (even if the supply of crude oil rises). The temporary shrinking supply can cause price hikes. Yesterday for example the US average gasoline price rose - even just from from $2.033 up to $2.038 (bespoke).

4. The Obama administration is slowing the fall of the gasoline price, says Bloomberg (bloomberg). Refineries are forced by law to mix gasoline with ethanol. The price of this biofuel fell less than the oil price because the cost of corn, used to make the biofuel, has shrunk less than the market price for oil.

I believe that the distance between oil and gasoline should shrink in the coming months because the mentioned effects should wear out. Therefore I expect lower gas prices even if oil doesn´t get cheaper.

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