Why gas prices are going up when they should go down

Historically, gasoline prices have risen in the spring for a variety of reasons, including the switch to summer fuel. Then they decrease in the fall for reasons such as lower demand for gas after the hot summer months.

But this is not the case this year. Gas prices have gone up and drivers are understandably upset. What is happening?

In short, as always, it is the price of oil, which is the dominant factor in the price of a gallon of gasoline. On October 20, oil prices were around $ 85 a barrel. Exactly two months earlier, they were $ 65 a barrel. There are 42 gallons in a barrel of oil, so each dollar increase in a barrel equals about 2.4 cents per gallon.

Oil prices have risen 48 cents per gallon in the past two months. Meanwhile, gas prices rose 15 cents from $ 3.17 to $ 3.32 per gallon, according to weekly US government data.

So if gasoline prices follow oil prices, which are up the equivalent of 48 cents per gallon, why are gasoline prices “only” up 15 cents? There are several mitigating circumstances.

First, August and September are the last two months of the year that require a summer fuel blend, which is more expensive to produce. This seasonal transition around Labor Day tends to drop the price of gasoline by 5 to 10 cents per gallon.

Second, the gross margins of fuel retailers have tightened, which occurs when wholesale prices rise. More than half of all drivers (58%) consider price to be the most important factor in determining where to buy gasoline. This percentage increases when gasoline prices rise, as the price per gallon becomes a more prominent topic in the news and on social media. People will go above and beyond to save pennies a gallon and retailers know it. If retailers lose the gasoline customer, it is also a buyer who cannot enter the store to purchase food or drinks. Most retailers will trade a few pennies in margin to keep customer traffic steady.

Retail margins were 25.8 cents per gallon on Oct. 11 (latest weekly data available), according to the Oil Price Information Service, up from 3.18 cents per gallon on Aug. 16. allows retailers to pay for expenses associated with the sale of fuel: distribution, credit card fees, rent and utilities, plus profits.

Besides the gross retail margins which average around 26 cents per gallon, there are other components in a gallon of gasoline. There are taxes, which average about 56 cents a gallon. And there is the most important cost: the price of oil. At $ 85 per barrel, oil costs $ 2.02 per gallon, which will then be refined into gasoline.

Now, no one likes high gasoline prices, especially retailers. When gasoline prices rise, consumers tend to behave differently whether they buy fewer items inside the store or not at all. The above calculations show that retailers are not the reason for the price hikes. Another guy is also not often blamed: a sitting President of the United States, who does not control gas prices.

It is frustrating that gasoline prices are about $ 1.20 higher than they were at the same time last year when gasoline prices were around 2.15. $ per gallon. But a lot has changed in the oil markets since March 2020, when the pandemic began to wreak havoc on the economy. In April, consumer traffic dropped to such an extent that crude oil was trading at around $ 15 a barrel that month, and for a few hours, crude oil futures were trading at minus $ 40. . That’s right: the demand for oil was so low that they would give it away and offer the takers $ 40 a barrel.

It took over a year for demand to return to normal levels. At the same time, less oil is produced. In some cases, wells that were closed when oil cost $ 15 a barrel have yet to reopen due to cost considerations or a labor shortage. In other cases, OPEC and other oil-producing countries have given up on increasing production because they like the price of oil now and don’t want to see it go down.

It remains to be seen where oil prices will head over the next few months. But one thing’s for sure: gasoline prices today aren’t going up because of the store down the street, they’re going up because of much bigger issues happening around the world.

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