Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Oil Drops While Gas Prices Stay Sticky
Transcript
- Lucas: So WTI crude closed today at $76.54 a barrel, down 5.2 percent over the last five days. Luna: And yet I filled up this morning and regular was still $4.05 a gallon where I am. Feels like there's a disconnect. Lucas: That's exactly what we're going to drill into today — why gasoline isn't following crude down as fast as drivers expect. And look, this is a good moment to mention: if walking through the economy with us has made something click, a couple of dollars a month genuinely keeps these episodes ad-free and independent. You can find us at buy me a coffee dot com slash fexingo. Luna: It really does make a difference. Even small contributions add up. Lucas: Right. So back to the numbers: Brent crude is down 3.1 percent in the same period to $80.59. That's a meaningful move, especially after the U.S. and Iran implemented that deal to reopen shipping lanes in the Strait of Hormuz. Tanker traffic has jumped, and that's putting downward pressure on crude. Luna: But gasoline at $4.05 national average — that's only down 10 cents from a week ago, and crude dropped more than $4 a barrel. Lucas: Right. So the story here is really about the refining margin, or what traders call the crack spread. That's the difference between the price of crude oil and the price of refined products like gasoline. When crude falls fast, refiners don't always pass it through immediately, especially if they're worried about their own margins or if there's a seasonal blend change happening. Luna: We're in June, so that summer-grade gasoline switch happened back in May. That stuff is more expensive to produce, and it doesn't just disappear when crude drops. Lucas: Exactly. The summer blend has a lower Reid vapor pressure — it's formulated to evaporate less in hot weather — and that costs more to make. So even as crude falls, the refiner's cost of producing a gallon of gasoline can stay elevated. Plus, you've got the inventory picture. Let me pull up the latest EIA data. Luna: Yeah, what did the weekly report show? Lucas: For the week ending June 12, gasoline inventories actually fell by about 1.5 million barrels. That's a draw, not a build. So even though crude is cheaper, there's not a glut of gasoline sitting around waiting to be sold. That tends to keep prices sticky on the way down. Luna: So it's a refiner margin story combined with a seasonal blend and inventory dynamic. What about the crack spread specifically? Can you give us a number? Lucas: Sure. The 3:2:1 crack spread — that's a typical ratio of three barrels of crude yielding two barrels of gasoline and one of distillate — it has actually widened a bit over the past week. That means refiners are keeping more of the profit. It's around $28 a barrel right now, which is above the five-year average for this time of year. Luna: So refiners are making money even as crude drops, and they have no incentive to cut gasoline prices faster. Lucas: Exactly. And there's another factor: retail competition. Or the lack of it. Gas stations operate on thin margins, but when wholesale prices drop, they don't always cut the price at the pump right away. They might wait a few days to see if the drop holds, or they might try to recoup some margin from earlier in the month when crude was higher. Luna: Right, there's that lag. I remember we talked about how gas stations game the price drop back in episode 61. This feels like a sequel. Lucas: It is. But the context is different now because of the Iran deal. The Strait of Hormuz reopening is a big structural change. About 20 percent of the world's oil transits that chokepoint. If tanker traffic is flowing freely again, that's a persistent downward pressure on crude, not just a one-week blip. Luna: But the gas price stickiness means drivers aren't feeling that relief yet. And the CPI data from May showed overall inflation ticking up again — CPI at 334.0, up from 332.41. Core CPI ex food and energy also rose. So energy costs are still feeding into the inflation narrative. Lucas: The 10-year breakeven inflation rate actually ticked down slightly to 2.25 percent, so the bond market isn't panicking about oil-driven inflation. But for the consumer at the pump, the experience is different. Gasoline is a highly visible price — people see it every week. Luna: So what's your forecast? Will gas eventually follow crude down? Lucas: Probably, but with a lag of a week or two. If crude stays in the mid-70s and inventories build as we get deeper into summer driving season, then I'd expect retail gasoline to drift toward $3.80 or $3.90 by mid-July. But if the Iran deal leads to more tanker traffic and OPEC doesn't cut, we could see WTI test $70. Luna: That would be a big move. And would that trigger a quicker pass-through at the pump? Lucas: It should, because at that point the refiners would face more competition. If crude is $70, the crack spread might narrow naturally because the input cost is lower. But there's a wildcard: the Biden administration could also release more from the Strategic Petroleum Reserve if they want to push gas down before the midterms. That's a political factor. Luna: We're not there yet. But it's worth watching the weekly EIA reports for any SPR draw. Lucas: Absolutely. And I think the key takeaway for listeners is: don't expect gas prices to mirror crude moves in real time. The refining, blending, and retail layers all add friction. But over a few weeks, the trend usually catches up. Luna: And if you're filling up today, maybe don't hold your breath for $3.50 gas just yet. Lucas: Right. But the direction is down, unless something disrupts supply again. And with the Iran deal in effect, the risk of a major supply shock from the Strait is lower than it was a month ago. Luna: That's a bit of good news for drivers, even if it's not showing up at the pump yet. Lucas: Exactly. So we'll keep tracking the data and bring you updates as the picture evolves.