Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / How Gas Prices Stay High When Oil Drops 4 Dollars
Transcript
- Lucas: Crude oil has had a rough week. WTI is sitting around 85 dollars a barrel, down almost 4 percent in the last five days. Brent is off even more, nearly 4 and a half percent. Luna: And yet, if you filled up your car yesterday, you probably paid about the same as you did last week. Regular gas is still averaging 4.15 a gallon nationally. Lucas: That gap right there — crude dropping sharply while retail gasoline barely moves — is one of the most frustrating things for drivers. There's even a name for it in economics: the 'rocket and feather' pattern. Luna: Rocket and feather. So prices shoot up like a rocket when crude rises, but drift down like a feather when crude falls. Lucas: Exactly. And there are real structural reasons for it, not just price gouging. The biggest one is refining margins. Crude oil is only part of the cost of gasoline. You have to turn that crude into fuel, and right now, refinery capacity in the US is still constrained relative to pre-pandemic levels. The US has permanently shuttered about a million barrels a day of refining capacity since 2020. Luna: So even if crude gets cheaper, the refineries don't necessarily pass that savings through right away because they're operating at such high utilization rates. Lucas: Right. They're running close to 95 percent capacity. And when something breaks — a unit goes down for maintenance, a hurricane threatens the Gulf Coast — the margin on the remaining capacity actually widens. So the retail price holds. Luna: And we're also in that window where refineries have switched over to summer-blend gasoline. That's more expensive to produce, and it's a different chemistry that can't be easily imported if there's a shortage. Lucas: That's a great point. The summer blend requirement runs from June 1 through September 15 in most of the country. It's formulated to reduce evaporative emissions in hot weather, but it costs refineries more to make, and it can't be swapped out for cheaper winter blend if inventories get tight. So that adds another 10 to 15 cents a gallon versus what you'd pay in the winter. Luna: And then there's the timing question. Even if crude prices fall, the gasoline that's in the pipeline system right now was bought when crude was higher. So the price at the pump reflects crude from maybe two or three weeks ago. Lucas: That's the lag. Retailers don't reset their prices daily based on the futures market. They're selling fuel they already bought at higher prices. So when crude drops sharply over a few days, it can take two to three weeks for that to fully show up at the pump. And by then, crude might have bounced back. This is actually a conversation worth having. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: It's a small thing that makes a real difference. Keeps the show ad-free and independent. Lucas: Alright. So let's put a number on how little the pump has moved. WTI crude is down about 3.8 percent over the past five days. The average national gas price has dropped from about 4.18 to 4.15. That's less than a 1 percent decline. In dollar terms, the driver saves about three cents per gallon. Luna: And if you do the math on a typical 15-gallon fill-up, that's 45 cents. Not exactly stimulus-level savings. Lucas: Compare that to what happens when crude jumps. Back in late May, when oil spiked on the Kuwait airspace closure, gas prices rose nearly 15 cents in a week. Same size move in crude, but the retail response was five times faster. Luna: Why is that? Why do retailers feel comfortable raising prices fast but hesitate to cut them? Lucas: Part of it is competitive dynamics. When crude rises, every station knows their replacement cost is higher, so they all raise prices together. There's no penalty for being the first mover. But when crude falls, the station that cuts first takes a margin hit if their competitors don't follow. So everyone waits. It's a prisoner's dilemma, and the equilibrium is slow to fall. Luna: And that's made worse by the fact that gasoline demand is still strong. We're in driving season. Memorial Day is behind us, July 4th is coming. People are taking road trips. So even with high prices, demand isn't collapsing. Lucas: Exactly. The Energy Information Administration reported last week that US gasoline demand was 9.3 million barrels per day. That's up from 8.9 million at the same time last year. So retailers have pricing power. They don't need to slash prices to move volume. Luna: And then there's the Iran factor. The headlines this weekend are all about a possible peace deal that could bring Iranian oil back to the market. That's part of why crude dropped this week. But that's a supply-side story for crude, not necessarily for gasoline. Lucas: Right. If the Iran deal goes through and sanctions are lifted, Iranian crude could add maybe 1 to 1.5 million barrels per day to global supply. That would put downward pressure on crude prices, which eventually feeds into gasoline. But the timeline is months, not days. And Iranian crude is heavy and sour — it's not the same grade that US refineries are set up to process. So the direct impact on US pump prices is muted. Luna: Plus, any deal has to be implemented, verified, and then production has to ramp up. Iran's been under sanctions for years. They can't just flip a switch. Lucas: No. The International Energy Agency estimates it would take at least six months for Iranian output to return to pre-sanctions levels of about 3.8 million barrels per day. So for this summer's driving season, it's essentially a non-factor for gasoline prices. Luna: So where does that leave us? Gas at 4.15 for the foreseeable future? Lucas: I think the floor for gasoline this summer is probably around 4 dollars, unless crude falls below 80. And crude has been oscillating between 80 and 95 for months. The market is still tight. OPEC+ is holding production cuts, US strategic reserves are at their lowest in decades, and global refining capacity is still strained. Luna: So the rocket and feather dynamic means that even if the Iran deal gets signed, drivers won't feel relief at the pump until maybe September or October. Lucas: If at all. Because by then, the summer blend requirement ends, and refineries switch back to cheaper winter gasoline, which could lower prices by 10 to 15 cents anyway. So any Iran-driven crude drop might just get absorbed into that seasonal decline. Luna: And in the meantime, every time there's a headline about a refinery outage or a hurricane threat, you can expect pump prices to jump instantly, even if crude is flat. Lucas: That's the asymmetry. The market passes through cost increases quickly and cost decreases slowly. It's not a conspiracy. It's a structural feature of a supply chain with high fixed costs, limited storage, and inelastic demand. But it's worth understanding, because it shapes how inflation feels to most people. Luna: Gasoline is one of the most visible prices in the economy. When it's high, people feel poorer, even if their wages have gone up. Lucas: And that's why we track it. One thing to watch this week: the CPI report for May came out showing headline inflation at 3.4 percent year-over-year. Core inflation, which excludes food and energy, was at 3.1 percent. Gasoline prices were actually a drag on the headline number in April, but if they stabilize around 4.15, that drag turns into a tailwind for inflation. Luna: So higher gas prices could keep overall inflation stickier than the Fed wants. Luna: Alright. So to sum it up: crude is down, gas is not. Summer blend, high refinery utilization, strong demand, and the rocket and feather effect all explain why. And the Iran deal, even if it happens, won't change that before Labor Day. Lucas: That's the picture. We'll keep watching the data and the headlines. Next episode, we'll talk about something else that's been moving — the clean energy stocks took another hit this week, and we want to understand why. Luna: Looking forward to it.