Biden calls for a faster drop in gas prices as oil plummets

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Biden calls for a faster drop in gas prices as oil plummets

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“Oil prices are falling, so should gas prices,” 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 increase their profits at the expense of hard-working Americans. “.

The administration’s focus on the complexity of energy prices shows the level of frustration within the White House at one of the central drivers of high inflation.

Prices at the gas pump are coming down, but only very gradually. The national average for regular gas dropped to $ 4.31 per gallon on Wednesday, according to AAA. That’s a penny down from Tuesday and two pennies from Monday.
This is despite the fact that Brent crude plummeted 28% between the intraday peak on March 6 and the close on Tuesday.

“It seems to take a long time”

This is nothing new. The industry also 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 are going down, it looks like it takes a long time. You can’t deny the data that’s out there.”

Old or new, Biden is no fan, especially after observing this phenomenon last fall, when gas prices slowly declined after the administration released emergency oil reserves and Omicron struck.

“Try explaining what rockets and feathers are like to President Biden, and you’d better be ready to hear, ‘This is a bunch of malarkeys’ coming back on you,” a senior White House official told CNN. “The president is fully in his right to point out that if you have rockets going up, you have to have rockets going down, not feathers.”

The price of oil fell by 30% in one week.  What does it give?

But it might be unreasonable to say that pump prices should change instantly just because oil prices do. It takes time for price swings to seep through the supply chain.

A gas station owner could sell fuel purchased days ago today when oil prices were much higher. (This is especially true in today’s extremely volatile market.)

“Don’t get me wrong. There would be some delay,” Lipow said. “What if I’m the guy who just bought my tanker load yesterday and the crude oil dropped in the next couple of days?”

Tom Kloza, global head of energy analysis at the Oil Price Information Service, said gas stations have no choice but to convey the impact of rising oil prices on the climb due to pressure on their profit margins. .

“And on the way down, it’s like, ‘We’ll be as patient as possible,'” Kloza said. “They will fall, but at a much slower rate.”

Joe Brusuelas, chief economist at consulting firm RSM, noted that gasoline prices are a function of past purchases and expectations about the cost of future deliveries – and right now there is great uncertainty about the direction of oil prices. .

“The criticism of gas station pricing is somewhat misleading,” Bruseulas said.

$ 1,300 hit to families

There are real economic consequences here.

According to Moody’s Analytics, every 10 cent increase in the price of gasoline costs consumers at least $ 11 billion over the course of a year.

Gas prices have risen over the past year and a half and at the end of last week they were about $ 1.50 a gallon higher than the 2019 average. If prices stay that high, consumers will pay $ 165 billion more. in 2022 compared to 2019, according to Moody’s Analytics.

The price of oil fell by 30% in one week.  What does it give?

In other words: Average annual gasoline spending would increase by about $ 1,300 per US household, Moody’s told CNN.

The senior White House official suggested that gas station owners are not passing the savings on to consumers as quickly as possible.

“This is using pricing power in a way that isn’t particularly fair from a consumer perspective,” the official told CNN.

GasBuddy’s Patrick De Haan said earlier this week that the drop in gas prices should accelerate if oil stays below $ 100 a barrel.

“The stations have lost their jersey going up, but now the margins are improving and the discounts will begin to pass to you,” De Haan wrote to Twitter.

“Unequal” link between oil and gas prices

Of course, the oil industry was in deep crisis just two years ago. Oil prices plummeted, with US crude turning negative for the first time ever, causing gasoline prices to drop dramatically.

The National Association of Convenience Stores, a trading group representing the fuel retail sector, did not respond to a request for comment.

A spokesperson for the American Petroleum Institute, the commercial group representing the oil and gas industry, pointed to a December blog post claiming that the “rocket and feather” effect is not unique to the energy sector.

“Replacement costs based on current market prices tend to drive up daily prices, but it often takes longer for competition between retail stations to reduce them,” the API said in the post.

There is some academic research that supports the White House argument.

The Federal Reserve Bank of St. Louis released a report in 2014 pointing out that there is an “unequal” relationship with how oil prices affect gas prices. That report was based on a review of academic work that measured the so-called oil and gasoline pass-through.

“When oil prices rise after being stable for some time, gasoline prices go up rapidly,” the Fed newspaper said. “Conversely, when oil prices fall after being stable for a while. ‘of time, gasoline prices are slowly falling “.

Who owns the gas?

Biden’s focus on this issue comes after Democrats in the House wrote a letter last week urging the Congressional leadership to immediately investigate and hold hearings on “alleged price counterfeiting in the oil and gas industry.”
The Democrats also introduced a large windfall oil profit tax that would aim to “curb the profit” of oil companies.

Although gas stations are often decorated with the logo of a major oil producer such as Exxon or Shell, they are often owned and operated by independent dealers. Gas station owners are allowed to represent that domestic brand.

For example, Exxon Mobile (XOM) claims it does not own or operate retail gas stations in the United States, although there are countless Exxon and Mobil gas stations across the country. At the end of 2020, Exxon listed nearly 11,000 distribution sites in the United States.
According to the American Petroleum Institute, oil refineries own less than 5% of the nation’s approximately 150,000 retail service stations. Many gas stations are owned by an individual or family, while others are part of a corporate entity that owns hundreds of them.

At the end of the day, Kloza said people who can wait before buying gas will benefit.

“If you can hold five days to refill the tank, you will get a lower price,” Kloza said.

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