If Oil Prices Are Falling, Why Are Gas Prices Still So High?

Trying to keep up with the ups and downs of the global oil market these days is a challenge. After rapidly rising to their highest price in years, oil prices recently dropped back to a point closer to what had existed prior to Vladimir Putin’s invasion of Ukraine. The whiplash inducing few weeks initially saw gas prices rise in tandem with oil prices, but then fail to drop as the price of crude fell. Indeed, in some markets gas prices have continued to rise even as oil prices decline, prompting some politicians, including President Biden to ask why.

Vladimir Putin’s attack on Ukraine was cause for serious alarm among oil traders. Even though Russia supplies just a little more than 11 percent of the world’s crude, any disruption to global supplies typically sends prices higher. With the United States and the European Union countries imposing various economic sanctions on Russia including a ban on oil imports, supplies were immediately impacted. Uncertainty about future supplies also rose as other oil-producing nations indicated that at least in the short term, they will largely stick with their existing output strategies. Indeed, the decline in crude prices following their sharp rise can be attributed to not to an increase in production by OPEC nations, but instead to a decrease in demand by China. China, the world’s biggest importer of oil, is struggling to contain an outbreak of COVID-19. With huge swaths of the country in lockdown, demand for oil has plummeted, allowing crude prices to moderate.

So, what’s with the high price at the pump? Some suggest that it’s simply old fashioned price gouging by oil companies and gasoline retailers, that oil companies including ExxonMobil, ConocoPhillips, Shell, and even gas retailers like Costco see Vladimir Putin’s attack on Ukraine as an opportunity to boost profits. In fact, Joe Biden, noting that previously when oil prices were at $96 per barrel, gas prices were just $3.62 a gallon rather than the current $4.31, warned that oil and gas companies shouldn’t pad their pockets at the expense of hardworking Americans. Others, however, disagree with his assessment, arguing that gas stations typically price their gas using their replacement cost, or what it will cost them to refill their tanks, as a starting point for setting the price at the pump. Right now, that cost is high, but as the reduction in crude prices filters through the supply chain, gas prices should moderate. However, for those who saw gas prices shoot up virtually overnight, the idea that there is a lag between crude prices and retail gas prices may not be a convincing explanation for the current disconnect between oil and gas prices.  

Discussion Questions:

1. Joe Biden has highlighted the disconnect between oil prices and gas prices and warned against profiteering. Can the U.S. government force producers to lower prices at the pump?  Do consumers have any recourse against oil companies and gas retailers? 

2. Privatization is supposed to lead to a more competitive marketplace. Yet, if oil companies and gas retailers unofficially act in concert to keep gas prices high even as oil prices drop, is it time to think about nationalizing the industry? Should essential commodities be sold by private enterprises, or should they be run by the government?

3. What effect do higher oil and gas prices have on inflation? Think about different parts of the global supply chain as you respond to this question. Can current inflationary trends be cooled if gas prices remain high?

Sources| Bloomberg: Biden Warns Oil Firms Against Price Gouging After Russia Ban, Deja Vu for Oil Markets As Biden Calls Out Surge in Pump Prices; CNN: Biden demands faster drop in gas prices as oil tumbles; NY Times: Oil Prices China; Photo by Yassine Khalfalli on Unsplash