Economics

People Are Paying The Same Price for Gas at 5 a Barrel as They Did at 40 a Barrel – WHY

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There is an interesting thread conversation that is happening on reddit that is discussing, “Why are people paying similar pricing for fuel now at 5 a barrel as they did when it was 40 a barrel.”

There are many reasons for this, some seen, some known, some not seen, some not known.

This comment is the highest rated of the ongoing thread. Read and add your voice.

“It’s a combination of “yes, it has gone down”, and “There’s a lot of other factors at work”. Crude Oil is currently around 5 for WTI (West Texas Intermediate, the benchmark price for oil used in the US.), compared with about 40 at its peak. A barrel of oil is 42 gallons (which, when refined, includes both gasoline as well as petrodiesel, kerosene, heating oil, etc.), so each change in the price of Crude Oil is expected to change gasoline & other refined products by about 2 cents per gallon.

There’s been about 0 decrease in the price of oil, so, all things equal, the price of gasoline should have decreased by about .60. It actually has decreased by about .20 (Two years ago, I remember paying .60 / gallon, and right now, it’s .35 here – I live in one of the cheapest markets for gasoline, though, so it’s likely higher elsewhere).

Why the offset between .20 and .60? Well, part of it is that gasoline is pretty inelastic in its demand – a big fancy term that means that we don’t change our consumption much when prices change. People are willing to pay more than .00 / gallon, so oil companies can raise their prices without losing too much demand (technically quantity demanded, as demand is the curve).

Another reason is that refineries sometimes go offline, which has the effect of lowering the price of crude (less crude is being used to produce refined products) while raising that of gasoline (less gasoline being produced from crude). Right now, we have a ton of oil being drilled out of the ground, but the amount of refining capacity hasn’t gone up by nearly as much. When oil prices decrease, that lowers the cost for refineries to buy the raw material to process. But ultimately, what consumers demand is not crude oil – it’s gasoline, and the demand for gasoline hasn’t decreased nearly as much. Refineries are going to charge the price that they can on the refined goods side, which need not perfectly correlate with the price for crude oil – the raw material. This tends to make you really happy if you’re a refinery. But it makes you wonder what’s going on to see 5 crude and high gas prices. Oil prices do affect the supply curve for gasoline, as oil is a cost in the production of gasoline. But the demand side of gasoline also plays into consideration, and people are still buying at [price in your area], so that’s what gets charged.

There’s also the phenomenon that when prices fall, gasoline prices at the retail level don’t fall as quickly or as hard – there’s a saying that prices tend to shoot up like a rocket and fall like a feather. From the perspective of a retailer, you don’t want to charge so little that you lose money, so you raise prices quickly when your costs increase. But when costs fall, consumers are going to be happy with any price decrease, so you don’t lower prices by as much, and your margins increase.

So, where does the rest of the cost of gasoline come from? Mostly the cost to ship the oil, refine & process it, and then distribute it to wholesalers and then to retail (and remember, those refiners are enjoying fat margins right now because their costs are low and their consumers will pay). There’s also going to be 30-60 cents of gasoline tax, depending on which state you live in. Surprisingly, the retail markup is usually just a couple of percent – it’s a very thin margin product designed to get you into the store and buy the overpriced items in the “convenience” store.

TL; DR version: Crude Oil Prices are only one part of the picture. Taxes & Refinery costs are other big portions of the cost of gasoline, and refineries can charge more for gas despite lower prices for crude oil and increase their profit margins because consumers will pay for it.” ~[DriftingSkies](http://www.reddit.com/user/DriftingSkies)

[READ THE THREAD](http://www.reddit.com/r/explainlikeimfive/comments/3cf7e2/eli5_why_do_people_pay_a_similar_price_for_fuel/)

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“People Are Paying The Same Price for Gas at 5 a Barrel as They Did at 40 a Barrel – WHY”