These gas prices are just insane. I actually had the thought to post my thoughts on this (including a slight conspiracy theory) over a week ago (even before James’s post last week, but haven’t had the time to pull all of my thoughts together. But the continued drop in gas prices is driving me to write about it now.
I mean, really — gas prices in Richmond went below $2 yesterday at some gas stations. Is that crazy or what? I cannot remember the last time gas prices were below $2? Does anyone?
Take a look at the price of oil over the last year. Oil prices are about 25% lower than a year ago, and gas prices are about 25% lower than a year ago. (I’m using Richmond prices as my point of reference.) Seems to make sense, right? Well, there should be a delay for refining the oil into gas and then getting it delivered. (I still haven’t found a reliable source for how long that takes on average.) And consider the peak summer prices to now — around $145 per gallon of oil in early- to mid-July to about $60 now, but gas prices have gone from $4.00 per gallon to $2.20 per gallon. That’s about a 45% reduction in gas prices while oil prices have tumbled almost 60%. Those two averages don’t seem to line up!
You’re forgetting that crude oil prices only account for somewhere between 45% and 60% of the overall cost of gas (a 10-percent rise or fall in oil price should yield about a 5- to 6-percent rise or drop in gas prices), with transportation and taxes (both relatively fixed costs) making up the difference. (Here’s an excellent primer on the topic and the trends throughout this decade.) And with this in mind, the reduction from peak in summer to now appears to be more rational than the rapid reduction in the last month.
So, why are we seeing such a strong match in the change in prices this past month? It could be that we were getting gouged over the summer. (It sure felt like it at times.) Or you can just fall back on the old supply-and-demand theory. That could drive these drops because there is excess supply now. But I really don’t sense that people are cutting back on driving that much, resulting in an oversupply situation.
Comparing those two situations, I feel like my first explanation was more likely (gouging in the summer, with the uncertainty of the hurricane season around). However, I was wondering on a drive in to work a couple of weeks ago whether there could be a situation where the suppliers want to reduce the pain on the consumer leading into the election. But that leads to the question — why would they want to do that? I cannot easily answer it, as I start to get myself twisted around on the pros and cons of such a seemingly irrational decision. The best I can do is that if Barack Obama wins, with a Democrat-controlled Congress, you’ll likely see offshore drilling restricted again. (The previous restriction was allowed to expire earlier this month.) That reduces easier drilling opportunities for US oil companies. But at the same time, increased drilling is going to eventually drive down prices for oil across the board, which may make some of these (and other) drilling opportunities less cost-effective. And these explanations are still way too simplistic for what I’m thinking and seeing, but I feel limited by time, space, and my own mental capacity and knowledge to sort through it.
So, why are the prices dropping so much more than expected with the cost of oil? You got me. And if it moves up over the winter to something more in line with oil prices, perhaps there was something going on with driving down gas prices more than expected.
That’s it for my irrational thoughts at the moment. I’ll go back to trying to be rational tomorrow.
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