Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Gas Prices Take Forever to Drop Even When Oil Crashes
Transcript
- Lucas: So regular gasoline is averaging four dollars and thirty cents a gallon nationally as of June first. WTI crude closed today at ninety-one dollars a barrel, down more than five percent over the last five days. And yet I guarantee you the pump price hasn't dropped a nickel in most places. Luna: Every driver I know is asking the exact same question. Oil plunges, gas stays put. Is it just the oil companies being greedy? Lucas: That's the intuitive explanation, and there's some truth in it, but the mechanics are more interesting. The gap between crude oil and retail gasoline is not arbitrary. It's driven by something called the crack spread — that's the difference between the price of crude oil and the wholesale price of gasoline and other refined products. Luna: Right, so refiners buy crude and 'crack' it into gasoline, diesel, jet fuel. The crack spread is their gross profit margin. So if crude falls but the crack spread widens, gasoline doesn't drop as much. Lucas: Exactly. And right now the crack spread is historically wide. Look at the wholesale gasoline price — the RBOB futures contract — versus WTI. That spread has been hovering around thirty dollars a barrel. The long-term average is more like fifteen to twenty. So refiners are keeping a bigger slice. Luna: But why is the spread so wide? Is it just that refiners have pricing power? Lucas: Partly. But there's also a real capacity constraint. U.S. refinery capacity has actually shrunk over the last few years — a few refineries closed during the pandemic and never reopened. Plus we're in summer driving season, and summer-grade gasoline is more expensive to produce because it has lower Reid vapor pressure — fancy term for it doesn't evaporate as easily. That requires different blending components. Luna: So even if oil gets cheaper, refiners are running near full tilt and they can charge a premium because supply is tight. I get that. But doesn't that sound like a structural problem? Like, we've lost refining capacity and now we're stuck with higher margins? Lucas: It is structural. The Energy Information Administration estimates U.S. operable refining capacity at about eighteen million barrels per day. That's down from about nineteen million pre covid. And demand is back above nineteen million barrels per day in the summer. So we're importing gasoline, which adds cost too. Luna: And imports aren't cheap, because global refining margins are also high. Europe has its own issues with natural gas prices affecting refinery operations. Lucas: Right. So the crack spread being wide isn't just domestic. It's global. Now, one thing I want to highlight: the price at the pump includes federal and state taxes — about forty cents per gallon on average. And then there's distribution, branding, and retail markup. So when crude drops by five dollars a barrel, that's about twelve cents per gallon in potential savings. But if the crack spread widens by five dollars at the same time, the pump price doesn't budge. Luna: So the consumer sees zero relief even though the headline crude number is falling. That's frustrating. And politically, it's a nightmare for the administration. Lucas: Yeah, the White House has very few levers. They've talked about releasing more from the Strategic Petroleum Reserve, but that's mostly crude, not gasoline. And even if you add crude supply, if refineries can't process it faster, it doesn't translate into more gasoline. Luna: There was talk of a federal gas tax holiday, but that didn't go anywhere because it's expensive and doesn't target the real problem. Lucas: Exactly. So the real question: when will drivers catch a break? The answer is probably not until after Labor Day, when demand falls and refineries switch to cheaper winter-blend gasoline. That's when the crack spread typically collapses. Luna: So if you can wait until September to fill up, you might save twenty to thirty cents a gallon. That's the practical takeaway. Lucas: Yeah. And in the meantime, the oil price drop does hurt producers. Look at the XLE energy sector ETF — it's up slightly over the past five days, but that's because Exxon and Chevron are diversified. The pure-play exploration and production companies in the XOP are flat to down. Luna: But refiners? Their stocks have actually held up well because their margins are expanding as crude falls. So there's a divergence between upstream and downstream. Lucas: Right. And that's the crack spread story in a nutshell. By the way, if you've been following these episodes and wondering why we keep coming back to refining margins — it's because this is genuinely the most important hidden mechanism in energy economics right now. Luna: We geek out on this stuff, and we love that you stick with us. If you've gotten something out of it, you can actually keep these episodes going — literally. Lucas: Yeah, a couple of dollars a month is what it takes to keep the show ad-free and independent. If that's something you can do, just head to buy me a coffee dot com slash fexingo. It makes a real difference. Luna: And we mean that. No pressure, but if you've learned something from this crack spread deep dive, that's the place to chip in. Lucas: Alright, back to the numbers. One more data point: the core CPI, which strips out food and energy, is still running at about 3.3 percent year over year. Gasoline is actually one of the few components that could bring headline inflation down if it falls — but only if the crack spread cooperates. Luna: So if the crack spread stays wide, gasoline stays elevated even with lower oil, and that keeps CPI sticky. The Fed watches that. Lucas: Exactly. The ten-year breakeven inflation rate is at 2.36 percent, basically flat. The market is not pricing in a big inflation breakout, but it's also not expecting a collapse in gasoline prices. Luna: So we're in a weird equilibrium: oil down, gas steady, refiners happy, drivers annoyed, and the Fed cautiously watching. Lucas: That's the energy economy in June 2026. One number to remember: thirty dollars — the current crack spread. If that narrows to twenty, you'll see gas at three ninety-nine. If it stays wide, you'll be paying four thirty until the leaves turn. Luna: And that's why the price at the pump is disconnected from the headline oil price. Good episode.