“Oil prices are decreasing, gas prices should too,” Biden said on Twitter. “Last time oil was $96 a barrel, gas was $3.62 a gallon. Now it’s $4.31. Oil and gas companies shouldn’t pad their profits at the expense of hardworking Americans.”
The administration’s focus on the intricacies of energy prices shows the level of frustration inside the White House with one of the central drivers of high inflation.
‘It just seems to take a long time’
This is nothing new. The industry even has a nickname for this practice: Rockets and feathers.
“This has been going on for 40 years,” Andy Lipow, president of consulting firm Lipow Oil Associates, told CNN. “Prices do dip, it just seems to take a long time. You can’t deny the data that is out there.”
Old or new, Biden isn’t a fan, especially after observing this phenomenon last fall when gas prices retreated slowly after the administration released emergency oil reserves and Omicron hit.
“Try explaining how it’s just rockets and feathers to President Biden, and you’d better be ready to hear, ‘That’s a bunch of malarkey’ coming back at you,” a senior White House official told CNN. “The president is very much within his rights to point out that if you’re going to have rockets on the way up, you need to have rockets on the way down, not feathers.”
But it may be unreasonable to say pump prices should change instantly just because oil prices do. It takes time for price swings to filter through the supply chain.
A gas station owner may be selling fuel today that was purchased days earlier when oil prices were much higher. (That’s especially true in today’s extremely volatile market.)
“Don’t get me wrong. There would be some lag,” Lipow said. “What if I was the guy who just bought my tanker load yesterday and the next two days crude oil dropped?”
Tom Kloza, global head of energy analysis at the Oil Price Information Service, said gas stations have little choice but to pass along the impact of higher oil prices on the way up because of the pressure on their profit margins.
“And on the way down, It’s like, ‘We’ll be as patient as we can,'” Kloza said. “They will fall, but at a much slower pace.”
Joe Brusuelas, chief economist at consulting firm RSM, noted that gasoline prices are a function of past purchases and expectations around the cost of future deliveries — and there is vast uncertainty right now about the direction of oil prices.
“Criticism of price setting at gasoline stations is somewhat misguided,” Bruseulas said.
$1,300 hit to households
There are real economic consequences here.
Every 10-cent increase in the price of gasoline costs consumers at least $11 billion over the course of a year, according to Moody’s Analytics.
Gas prices have surged over the past year and a half, and at the end of last week, they stood about $1.50 a gallon higher than the 2019 average. If prices stay this high, consumers will pay $165 billion more over the course of 2022 than they did in 2019, according to Moody’s Analytics.
Put another way: Annual average spending on gasoline would climb by roughly $1,300 per US household, Moody’s told CNN.
The senior White House official suggested gas station owners are not passing along savings to consumers as quickly as they could.
“This is using price power in a way that is not particularly fair from the perspective of the consumer,” the official told CNN.
GasBuddy’s Patrick De Haan said earlier this week the gas price drop should accelerate if oil stays below $100 a barrel.
‘Uneven’ link between oil and gas prices
Of course, the oil industry was in deep distress just two years ago. Oil prices crashed, with US crude turning negative for the first time ever, driving gasoline prices dramatically lower.
“On any given day, retailers don’t know where wholesale prices could be heading, so they try to recapture lost margin as quickly as possible—because they don’t know if wholesale prices may rise and margins could tighten,” the NACS said in the post.
The industry group also pointed out that one complicating factor is that the fuels industry is currently going through its annual government-mandated transition to summer-blend fuels.
“Retailers want lower gas prices just as much as their customers,” the NACS said. “When prices are low, consumers have more disposable income to make in-store purchases. They’re also happier, which is also good for business.”
The American Petroleum Institute, the trade group representing the oil and gas industry, said in a statement that retail prices in many industries go down slower than they go up.
“On gas prices, the American people are looking for solutions, not finger pointing,” said Frank Macchiarola, API’s senior vice president of policy, economics and regulatory affairs.
There is some academic research that supports the argument from the White House.
“When oil prices rise after being steady for some time — gasoline prices shoot up quickly,” the Fed paper said. “In contrast, when oil prices fall after being steady for some time, gasoline prices retreat slowly.”
Who owns the gas?
Although gas stations are often emblazoned with the logo of a major oil producer like Exxon or Shell, they are often owned and operated by independent retailers. Gas station owners are licensed to represent that household brand.
At the end of the day, Kloza said people who can wait before buying gas will benefit.
“If you can hold off five days to fill up your tank, you will get a lower price,” Kloza said.