Are gasoline prices fast and furious to spike, but slow and reluctant to fall? The short answer to this burning question is "Yes".
This year's Cinco de Mayo Mexican holiday may go down in US oil trading history as the day the oil prices spun out of control into their biggest free fall. Oil traders have already started calling it: "Jueves de Carniceria", which loosely translates to "Bloody Thursday".
However, motorists looking for relief at the pump were sorely disappointed when the average price for unleaded regular gasoline dropped a mere penny from $3.99 to $3.98 a gallon per the May 7, 2011 AAA fuel gauge report
The gasoline spot market is quick to react to any changes in the price of crude oil but there are a couple of steps in between the WTI or Brent crude oil prices and the retail pump prices.
Understanding this complicated business requires some basic knowledge on how the spot market interrelates with the system of eventually pumping gasoline into the tank of your vehicle. My course is called: “Gasoline Marketing 101” and you will need to pay attention as there will be pop quiz after reading this article. (42, 2.5)
Using the following flow chart explaibs how it works in the California gasoline spot market with others in the US operating in similar ways:
Factoids in the oil market for this week:
On Friday, May 6, 2011 the June (NYSE:WTI) West Texas Intermediate crude oil settled at $97.18 a barrel, down $16.75, the biggest ever drop for a week in dollars on the Nymex (New York Mercantile Exchange).
The June Brent crude oil price on the Intercontinental Exchange of London (NYSE:ICE) ended up at $109.13 a barrel, falling $16.76, also a record one week loss.
Earlier in the week Goldman Sachs’ analysts David Greely and Jeffrey Currie, who in April predicted this downside crude oil price correction, reinforced their pricing forecast for 2012. They said crude oil could still surpass recent price highs with world crude oil demand catching back up to supply. The timing of their announcement coincided with the death of Osama Bin Laden on May 1, 2011.
Expressions of relief by Americans from the seemingly never-ending wars on terrorists caused this week’s selloff in the oil futures market. The “fear factor” of $15 to $20 a barrel has been taken out of the posted prices for crude oil on the ICE and Nymex.
After crude oil prices dropped about 20% this week gasoline prices are still hovering around the $4 per gallon mark. Why is it they are raised faster in the up market than they fall in the down market?
The question may be answered with basic gasoline economics--when the price of crude oil rises up most of the increases at the pump take place within the first two weeks.
Furthermore, when oil prices sink down, it takes up to eight weeks for the savings to be passed along to consumers in the phenomenon known in the petroleum industry as
"asymmetric price adjustment."
Here is how it works in the real world of gas stations:
Branded station gasoline retailers receive deliveries on an almost daily basis, so there's some pressure to pass along price hikes without much delay.
Those stations cannot raise prices too fast or too furious because consumers tend to be extra-vigilant about shopping for bargains when oil prices are on the rise. When newspapers report gasoline prices are going up, drivers tend to comparison shop down to the last penny per gallon.
The asymmetry comes into play as soon as oil prices start to deflate. Freed from the constant reminders about rising fuel costs, drivers become less concerned in looking for the lowest price. Retailers don't have to worry as much by having to keep up with their competition.
As a result, station owners can keep drivers happy by knocking off just a few cents the "old" price as soon as they receive gasoline deliveries at the lower price.
My pop quiz has two questions:
How many gallons are there in a barrel of crude?
How many cents per gallon of gasoline does the difference of $1 represent in the price for a barrel of crude?
Hint - The answers are hidden at the end of one of the paragraphs in this article.
Bob van der Valk lives in Terry, Montana and is a Petroleum Industry Analyst with over 50 years of experience in the petroleum, gasoline and lubricants industry. He has been quoted by the news media and his opinions are also solicited by government entities. Bob can be contacted at: email@example.com or call him at (406) 853-4251
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.