Oil price down, Gas prices up: Why increasing the supply of oil won’t lower gas prices in the short term

Why are gas prices going up when the price of oil is going down?

Get the  KUSI interview on this story  with Public Watchdogs’ Executive Director, Charles Langley

 

There is a schism in the scheme of things.

According to the “Laws of Supply and Demand,” the price of a commodity will increase when it is scarce, and decrease when it is abundant.

As of this writing oil prices have been decreasing,  yet gasoline prices remain high.  By today, June 16, 2022, the average price of regular gasoline in California was $6.428 a gallon, down only a penny in the last two days from the all time record-breaking high of $6.438 on Tuesday, June 14.  Why is this?

Gasoline prices are not high because of any shortage of oil.

In the last ten years the USA has become the world’s largest exporter of crude oil. There is plenty of oil to go around.  The problem in California is that there is minimal competition between the oil refineries that make California gasoline.  And because California law mandates specific pollution fight formulas for gasoline at different times of the year, gasoline is almost never imported.  In addition, Californians are now paying the highest gasoline taxes in the USA, and on July 1, they are scheduled to increase another 3¢ per gallon  courtesy of Governor Newsom.

If gas prices are determined by oil prices, then the price of gas should have dropped by 14¢ in the last 48 hours

Instead, gas prices have only declined a penny per gallon, while on a per gallon basis, the price of oil has dropped by 14¢ a gallon in two days.

Here’s how to calculate the “price per gallon” of oil:

A barrel of oil holds 42 gallons. To calculate the cost of the oil in a gallon of gas,  simply divide the price of a barrel of oil by 42.  Most analysts, including Public Watchdogs, use the price of West Texas Intermediary oil, or “WTI” as a benchmark for the average price of a barrel of oil in the USA.    At this time, WTI is selling for $117 a barrel, which is down $6 from $123 a barrel on June 14th, two days ago.  On a per gallon basis, that $6 per barrel price cut is equal to a price drop of  14.3¢ per gallon.

In a perfect market, we would see a 14¢ per gallon price cut for gasoline in response to a 14¢ decrease in the price of oil, yet that has not happened.  Public Watchdogs believes that the reason for the market dysfunction is because there is minimal competition between oil refineries at the wholesale level.  When wholesalers start competing, the retail price of gasoline should decline.

The best way to force the oil companies to compete is to break them up.  Teddy Roosevelt did this in 1901 by using the Sherman Anti-Trust Act  to break up the the Standard Oil Trust into seven separate competitors.  Most of those competitors are still supplying oil and gasoline to the California market, and in the last 120 years they have learned to cooperate instead of compete.

This does not mean they are engaged in “price-fixing,” rather, the market is so consolidated that over time these competitors have learned that it is more profitable to maintain high prices than to engage in the sort of knock-down-drag-out cost-cutting that lowers profits and gas prices.

California is reputed to be the world’s third largest consumer of gasoline after the rest of the USA.  According to the U.S. Government’s Energy Information Agency (EIA) California was also the seventh largest crude oil producer in the USA, and that as of January, 2021, ranked third in crude oil refining capacity.  (source)

In other words, there is no shortage of oil, so getting California more oil isn’t going to work.  What will work is to do what president Roosevelt did in 1901: Break up the oil companies again and force them to compete.  We need a return of the Trustbusters.”

 

 

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