Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / How Gas Stations Are Gaming the Price Drop
Transcript
- Lucas: WTI crude is sitting at $76.27 a barrel this morning, down five and a half percent in just the last five days. That is a significant move. But walk into any gas station and regular is still averaging $4.05 a gallon — down only ten cents from when oil was above $88. Luna: So the question I keep hearing from listeners is: why isn't the pump falling faster? Is this just lag, or is something structural going on? Lucas: It's a mix, but I think the structural piece is bigger than people realize. Part of it is simple math — crude is only about half the cost of a gallon. You've got refining, distribution, taxes, and station markup. But the other part is that stations have been squeezed for months, and now they're trying to catch up. Luna: If walking through the economy with us has made something click — even just once — honestly, if today was worth a coffee to you, that's the link. It's buy me a coffee dot com slash fexingo. Lucas: Yep. Smallest ask in the world, and it keeps this thing ad-free and independent. So — back to the pump. Let's talk about what's actually inside that $4.05. Luna: Break it down for me. Lucas: Okay, so using typical U.S. averages in mid-2026: crude oil accounts for roughly $1.90 of that $4.05. Federal and state excise taxes add about 57 cents. Distribution and marketing add another 30 cents or so. The rest — about $1.28 — is the refiner's margin and the station's margin combined. Luna: And that combined margin is where the story lives right now. Lucas: Exactly. When oil was above $88, refiners were actually compressing their margins because crude prices were rising faster than they could pass through. Now crude has dropped sharply, and refiners are trying to widen their margins back to normal. They're not lowering wholesale prices as fast as crude is falling. Luna: So the station sees a slower drop from the refinery, and then the station itself is adding its own lag on top of that. Lucas: Right. And here's the thing — stations operate on extremely thin margins normally, often 5 to 10 cents per gallon. But during the spike period, they couldn't raise prices fast enough either because of competitive pressure and customer backlash. So now that wholesale prices are easing, they're holding retail prices higher for a bit to recoup lost margin from earlier. Luna: Is there any evidence they're actually doing this, or is it just theory? Lucas: There's real data. The Energy Information Administration tracks what they call the 'gasoline and diesel fuel wholesale/resale margin.' In the latest weekly data, that margin widened by about 4 cents per gallon in the first two weeks of June, even as crude fell more than $10. That's a clear signal. Luna: So the refiner is padding, the station is padding — and the consumer is stuck at $4.05 while headlines scream 'oil crashes.' Lucas: Exactly. And there's another layer: the 10-year breakeven inflation rate is at 2.25 percent, down just slightly from last month. That tells me the bond market isn't panicking about deflation from lower oil. They see this as a temporary supply shock, not a demand collapse. So there's no pressure from financial markets to force prices down faster. Luna: Interesting. So the bond market is basically saying 'this oil drop is fine, it's not a recession signal' — which takes away any urgency from the supply chain to pass through savings quickly. Lucas: Precisely. If the bond market thought this drop was the start of a deflationary spiral, you'd see the breakeven rate plunge, and you'd see political pressure to lower prices. Instead, the breakeven is stable, the Fed is still watching core CPI at 336.1, and the whole system just moves slowly. Luna: Let me push back a little. Some economists argue that stations aren't price-gouging — they're just rationally adjusting to the fact that gasoline demand is still strong. CPI data from May shows overall prices up, and the PCE price index hit 130.9 in April. So consumption is holding up. Lucas: That's fair. Demand hasn't collapsed. The May CPI reading came in at 334.0, up from 332.41 in April. That's still an inflationary environment. And when demand is inelastic — people need to drive to work — stations have pricing power. But the speed of the adjustment matters. If crude falls 5 percent in a week and retail falls only 1 percent, that's a deliberate widening. Luna: How long does this lag typically last? Lucas: Historically, retail gasoline prices follow crude with a lag of one to three weeks. So if crude stays at $76 or goes lower, we should see pump prices fall to around $3.85 or $3.90 by early July. But if the Iran deal headline from this morning — Trump calling it 'unconditional surrender' — leads to a supply surge, crude could fall further, and the lag could actually extend because stations will wait to see if the drop is real. Luna: So the Iran deal uncertainty actually gives stations cover to hold prices higher longer. Lucas: Yes. If you're a station owner and you think crude could bounce back to $85 next week because the deal falls apart, you're not going to slash your retail price today. You'll move slowly. That's rational risk management. Luna: And it also explains why the XLE and XLE holdings — the big oil stocks — haven't fallen as much as crude. XOM is at $137.81, CVX at $173.63. They're not down 5 percent on the week. Lucas: Right. The integrated majors have refining and marketing arms that benefit from wider margins when crude falls. So the stock market is pricing in that the margin expansion offsets the lower upstream revenue. That's actually a classic signal: when crude drops and refiners outperform, the market expects margins to stay wide. Luna: So for the listener feeling the pinch at the pump, what should they expect in the next two weeks? Lucas: I think we see another 10 to 15 cents of decline by the Fourth of July, assuming no supply shock. But the key number to watch isn't WTI — it's the wholesale gasoline futures contract, which is the real input for retail. That's already down more than crude. If that holds, stations will have to pass it through eventually because competition will force them. Luna: But if the Iran deal collapses or OPEC cuts deeper, all bets are off. Lucas: Exactly. And that's the uncomfortable reality: the price at the pump is not just a commodity price. It's a lagging indicator of a complex supply chain where every link has its own incentive to delay. Luna: So next time I see a headline screaming 'Oil Crashes!' I'll check the pump price before I get excited. Lucas: And check the wholesale margin data. That's where the real story is. For now, we're in a holding pattern — crude down, margins up, consumers waiting. Let's see if the Fourth of July brings some relief.