Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Gasoline Is Falling Faster Than Oil This Time
Transcript
- Lucas: So here's something you don't see every day. Oil prices have taken a beating over the past week — WTI crude dropped from about $95 a barrel to just under $85, and Brent is below $88. That's a roughly 10 percent decline in crude, depending on where you measure. Luna: Right, and usually when oil drops that fast, gasoline at the pump barely budges for weeks. But this time, regular gas has gone from $4.30 a gallon to $4.15 — that's a 15-cent drop in roughly the same window. Lucas: Exactly. So the question is: why is gasoline falling faster relative to oil this time? And is this a one-off or could it become the new normal? Because if you look at the history of the last couple of years, the pass-through from crude to pump has been notoriously sticky. Luna: Sticky is an understatement. In 2022, when oil went from $120 to $80, gasoline took like six months to come down. And just earlier this year, in our episode on gas prices staying high — that was episode 51 — we talked about that exact lag. Lucas: Yeah. And that stickiness is usually because of refining margins. When crude falls, refineries still have to cover their fixed costs, so they don't drop their wholesale prices as fast. Plus, they often have expensive inventory they bought at higher prices. But this time, something is different. Luna: Let's look at the crack spread — that's the difference between crude oil prices and the wholesale price of gasoline. I've got the data here. The gasoline crack spread has collapsed about 30 percent over the last week. That's a huge move. Lucas: Right. And a collapsing crack spread means refining margins are shrinking. So refiners are not just passing through the crude decline; they're actually cutting their margins. That's the opposite of what we usually see. The question is why. Luna: One big reason is new refining capacity. Remember the big refinery expansions in the Middle East and Asia that came online in late 2025? Those are now fully operational, and they're flooding the global market with gasoline. Lucas: That's a structural shift. The IEA's latest monthly report flagged that global refining capacity grew by about 1.5 million barrels per day in 2025, the biggest increase in a decade. Most of that is in China and India, but also in Saudi Arabia. So there's simply more gasoline supply competing for buyers. Luna: And on top of that, demand is actually softening a bit. U.S. gasoline demand this summer has been about 2 percent lower than last year, partly because of the higher price base and partly because people are driving more fuel-efficient cars. So you've got more supply and slightly less demand. Lucas: That combination means refiners can't hold onto fat margins. They have to cut wholesale prices to move product. And because crude dropped fast, they're also trying to destock expensive inventory, which adds downward pressure on gasoline prices. Luna: So in a way, the market is working the way textbooks say it should. But we should also talk about the Iran deal factor, because that's adding uncertainty. Lucas: Yeah, absolutely. Oil prices have been volatile because of the on-again, off-again U.S.-Iran peace deal. This weekend, headlines say the deal is in question after Israel struck Lebanon and Trump warned Iran not to 'blow it'. That kind of geopolitical noise usually keeps a floor under oil prices. But despite that, crude is still falling. Luna: Right, and I think that tells you the market is more worried about supply glut than supply disruption right now. Because if the Iran deal does go through, Iranian oil could come back into global markets. But even without it, the new refining capacity is already weighing on gasoline. Lucas: So let's zoom out to the broader economic picture. We've got gasoline falling, which is good for consumers. But core CPI is still rising — it hit 336.1 in May, up from 335.4, and the 10-year breakeven inflation rate is at 2.31 percent, which is sticky. So the Fed is watching this closely. Luna: Cheaper gasoline directly lowers headline inflation, but core inflation — which excludes food and energy — is still running hot. So the Fed can't declare victory yet. But it does give them a little more breathing room not to hike again. Lucas: Exactly. And that's the kind of nuance that gets lost in the daily market noise. The pass-through from oil to gasoline is faster this time because of structural changes in refining, not because of some temporary blip. If that holds, consumers might see sustained relief at the pump even if oil doesn't fall much further. Luna: But there's a risk: if refining margins get too compressed, some marginal refineries could shut down, especially in Europe and the U.S. That would reduce supply and eventually push gasoline prices back up. So it's not all one-way. Lucas: Yeah, the crack spread is already at levels where some refineries might be losing money. The question is how long they can sustain that. But for now, the consumer is winning. Luna: And speaking of winning — you know, we put this show together every day without any big corporate backing, no ads, no sponsors. It's just us and our research, and we're able to keep it ad-free because of listeners like you. If you've gotten something out of walking through the economy with us, a couple of dollars a month genuinely makes a difference. It keeps the lights on and lets us keep digging into these numbers. Lucas: Yeah, it's true. This show doesn't run on venture capital. It runs on people chipping in what they can at buy me a coffee dot com slash fexingo. No pressure, but if you value independent analysis without a corporate agenda, that's where you can support it. Luna: And we mean it — a couple bucks a month really does help. So thank you to everyone who already does. Now, back to refining margins: I want to dig into the regional differences. Because not all markets are seeing the same pass-through. Lucas: Great point. In the U.S., gasoline prices vary wildly by region because of different fuel blends and local refinery configurations. The Gulf Coast, which has excess refining capacity, has seen gasoline drop even more — some stations are below $3.80. But the West Coast, with its unique blend requirements and fewer refineries, is still above $4.50. Luna: So the national average masks a lot of variation. But overall, the downward trend is clear. And if this new refinery capacity continues to ramp up, we could see gasoline prices trend lower even if oil stabilizes around $85 or $90. Lucas: That would be a big deal for the Fed, because lower gasoline would pull headline inflation down further. But core inflation is the bigger worry. So the Fed might still hold rates steady while watching the data. Luna: Let's talk about the energy stocks, because they've been getting hammered. The XLE, the energy sector ETF, is down 1.3 percent in the last five days. ExxonMobil is down over 3 percent, ConocoPhillips down 1.6 percent. But interestingly, NextEra Energy, which is more of a utility, is up 2.4 percent. Lucas: That divergence tells you something. The market is pricing in lower margins for upstream oil and gas companies because of lower prices. But utilities benefit from lower fuel costs, and NextEra has a big renewable portfolio that's more about long-term power contracts. So it's a rotation out of pure-play oil and into more stable energy infrastructure. Luna: And solar stocks are still getting crushed. Enphase is down 4 percent on the week, First Solar down almost 3 percent. The clean energy ETF ICLN is flat, but that's mostly because of the utility component. Lucas: Yeah, clean energy has had a brutal year. But that's a separate story. For this episode, the main takeaway is: gasoline is falling faster relative to oil than in past cycles, and it's because of a structural increase in global refining capacity. That's a real shift, not a temporary anomaly. Luna: And it means consumers might see some relief sooner rather than later. But the bigger question is whether this break in the sticky pass-through pattern lasts. If it does, it changes how we think about the relationship between oil and the broader economy. Lucas: Right. For decades, the conventional wisdom was that retail gasoline lags crude by weeks. If that lag shortens permanently, the transmission mechanism from oil shocks to the economy changes. That's worth watching. Luna: So to sum up: oil down 10 percent, gasoline down about 3.5 percent, but the pass-through is faster than usual because refineries are competing with new capacity and lower demand. And the crack spread is collapsing. Lucas: Exactly. And if you want to track these crack spreads yourself, the data is published daily by the EIA and major refiners. It's a great leading indicator for pump prices. We'll keep an eye on it and report back if anything changes. Luna: Sounds good. That's it for this episode of Energy Economics with Fexingo. We'll be back tomorrow with another number that matters. Lucas: See you then.