Four Things to Know About Crude Oil and Gasoline Prices

Dean Foreman
Posted December 3, 2021

For months, the Biden administration has been in a quandary over elevated gasoline prices – at their highest levels since 2014. Press Secretary Jen Psaki acknowledged White House frustration this week because they believe downticks in crude oil markets haven’t immediately or completely been reflected at fuel pumps.

Unfortunately, the administration has looked in the wrong places for solutions – repeatedly asking oil cartel OPEC+ to more rapidly ramp up its crude production, while suggesting U.S. gasoline prices result from nefarious irregularities. The reality is the administration’s policies have effectively thwarted the best response to a global crude supply shortfall that has put upward pressure on gasoline prices – increased American oil production.

To address the market dynamics and any misunderstandings about them, here are four things consumers should know about crude oil, production and gasoline prices:

1. Cost of crude oil is the No. 1 factor in prices at the pump

To be specific, crude oil accounted for 57% of the cost of a gallon of gasoline in October, according to the U.S. Energy Information Administration (EIA). When more than half of the retail price stems from a single input, it’s not surprising that retail fuel prices have historically and closely tracked those of crude oil.

2. Overall, the cost of crude remains at the highest levels since 2014

While day-to-day crude costs move up and down – certainly contributing to White House perplexity – the big picture has been that crude rose to its highest levels in seven years because supply has lagged demand, ultimately leading to relative scarcity and increased import-dependence at higher costs and prices.

By the laws of basic economics, prices generally rise when goods become scarce – and as a global commodity oil have been a case in point this year. Over the past five to 10 years, the U.S. had abundant domestic production that led oil and refined product prices to run far lower than international prices.

However, with U.S. crude oil production down more than 1.5 million barrels per day compared with its highest levels in late 2019 and early 2020 – and, consequently, a return to U.S. petroleum net imports – prices not only have risen, but relative U.S. prices have generally risen to import parity, with historically small price differences versus international prices based on the costs to ship oil and any quality differences in different crudes. 

With this understanding of historical oil prices, the most assured remedy to re-assert downward price pressure would be a return to domestic production abundance, not begging an oil cartel to increase its output, which would still need to be imported.

3. The truth about “rockets and feathers” in retail prices

In many industries retail prices tend to come down slower than they go up – the so-called “rockets and feathers” effect with respect to crude oil prices that recently have decreased, grabbing the White House’s attention. This is because replacement costs based on current market prices tend to drive daily prices, but it often takes more time for competition among retail stations to bring them back down.

This is especially true in the case of diverse retail fuel sales, where 95% of stations are independently owned and not operated by oil companies, and more than 80% of fuel by volume is sold by convenience stores, where fuel often is the product that attracts customers. 

Local conditions and competition can therefore be an important contributor to the timing of price changes and attempting to use federal policies to alter local market outcomes is a fundamental misunderstanding of them.

In that light, the administration’s call for a Federal Trade Commission probe into retail gasoline prices is a distraction from the solution at hand – more American oil production. To be crystal clear, whether we look at the differences between retail gasoline prices and either the crude oil input costs of refiners or the wholesale prices that refiners sell to various segments as reported by EIA, retail prices this year have been relatively lower than they were last year and compared with historical averages over the past five to 10 years.

Given EIA’s data, perhaps the administration is concerned with local conditions that could vary and anecdotal reports. But, as the old saying goes, “the plural of anecdote is not data.”

4. Petroleum Reserves release unlikely to have much impact on retail prices 

The impact on global oil supply by the United States’ release of 50 million barrels of oil – relatively small compared with daily U.S. consumption of more than 20 million barrels per day, per EIA – obviously would be limited, even if it was timed to accompany releases by other nations from their reserves. 

Collective blowing in the wind cannot alter global supply/demand fundamentals on an enduring basis and is more of a gesture toward consumers heading into the holiday season. A core potential problem with the administration’s approach on the Strategic Petroleum Reserves is that these volumes might actually be needed for supply continuity if a disruptive global geopolitical event occurred, now that U.S. reliance on imported crude oil has risen. 

It’s important to remember that the U.S. energy revolution helped America achieve greater self-sufficiency, a semblance of energy independence, and at a minimum helped protect American consumers from global crude oil price spikes. That is currently lacking.

By contrast, with the aftereffects of the pandemic coupled with a panoply of Biden administration policies and proposals that significantly weaken the incentives to invest in America’s energy future, the impediments to domestic production have been identifiable and require a policy course correction that helps support American production.