What's Wrong with the White House claim on Gasoline Prices?

Frank Macchiarola
Posted March 23, 2022

API has discussed the reasons the prices of commodities tend to fall slower than they rise, including gasoline – most recently in a post by API’s chief economist, Dr. Dean Foreman in December, after the White House was frustrated because declining crude oil costs were not immediately or completely reflected at fuel pumps.

Foreman noted, this is generally because replacement costs of a commodity, based on current market prices, tend to drive daily prices. But it often takes more time for competition among retailers to bring them back down. Foreman:

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.

Count the White House among those who apparently do not fully understand how those markets work. President Biden tweeted last week:

Oil prices are decreasing, gas prices should too.

Last time oil was $96 a barrel, gas was $3.62 a gallon. Now it’s $4.31.

Oil and gas companies shouldn’t pad their profits at the expense of hardworking Americans. pic.twitter.com/uLNGleWBly

— President Biden (@POTUS) March 16, 2022

This prompted a number of responses, including one below from Bob McNally, founder and president of Rapidan Energy Group and a former senior White House policy official:

There's always a multi-week lag between global crude oil and domestic pump price changes, Mr. President. If these recently lowered crude prices stick, pump prices should follow. Recommend asking @EIA to explain these realities to you & your staff. Gouging is not an issue, sir.

— Bob McNally (@Bob_McNally) March 16, 2022

And this one from Josh Siegel, a reporter for Politico:

NEW: Democrats blame oil companies for high fuel prices. But the facts don't back them up. Charges of anti-competitive behavior are being swatted by analysts and even some Democrats who note there is always a lag between falling oil prices & pump prices https://t.co/HD6O9Oieis

— Joshua Siegel (@SiegelScribe) March 17, 2022

Then there was this thread by Garrett Golding, energy economist for the Dallas Federal Reserve, in which he answers a number of FAQs about rising and falling gasoline prices:

"Oil prices are down, so why aren't gas prices?"

This question is all over the place right now. Unfortunately there is a lot of misinformation and half-truths being spread in response. Most of my [few] followers are experts, but this thread is for those who are not. 1/

— Garrett Golding 🇺🇸🇺🇦 (@gjgolding) March 16, 2022

Golding points out that there is always a lag between crude oil prices and pump prices. Oil prices can shoot up quickly, but in the current situation it took almost two weeks for the full effect to be seen at the pump. After any crude oil price surge, Golding wrote, retailers are cautious about dropping their prices for fear that oil could jump up again – another factor for pump prices falling slowly.

Part of the last part of his thread is worth emphasizing:

In sum, for those wondering when pump prices will drop, the answer, hopefully, is soon. It's not price gouging or a grand plot by the industry. This is how the business functions.

As we say, suggesting there is something wrong going on in the rise and fall in gasoline prices is not new and just distracts from the reality that additional American oil production is needed to help put downward pressure on global crude costs. Such claims and well-worn policy diversions like this week’s misguided proposal to increase taxes on industry does not bring us closer to solutions.

The American people are looking for solutions, not finger pointing. Across the economy, retail prices in many industries go down slower than they go up. This is not a new phenomenon. As we have seen in the past, it takes time for changing market conditions to work through the supply chain and for the price of crude oil to be widely reflected in the price we pay at local gasoline stations.