Why Is Gas Price Remaining High When Oil Price Is Going Down?
Logic would seem to dictate that if oil prices are going down, the price of gasoline should follow suit and go down also.
However the opposite has been observed lately. Of course as is the case in any fluctuation of oil prices, there is a range of reasons responsible for this.
So why exactly is the price of oil dropping whilst the price of gasoline at the pump is remaining high ?
Large US strategic petroleum reserves
A sluggish economy, and hence slow economic recovery has meant that there is low demand for oil. Many blame Obama's austerity measures for this.
The US also has the largest emergency oil supplies in the world. The release of oil from strategic petroleum reserves pushes prices down as the supply of oil is increased. In fact, even a statement to the effect that the government is considering the release of emergency oil supplies is enough to knock oil prices down. One only has to look at what happened in March 2012 when President Obama released a joint statement with the British Prime Minister David Cameron, announcing that both the UK and US were considering the release of emergency oil supplies. This alone was enough to have an immediate effect on oil prices and knock them down.
Furthermore, another major reason is the safe haven buying of dollars because of concern over eurozone instability. There is naturally no sign that things will improve in the eurozone. In fact it seems as if things may only get worse, which in turn will serve to drive oil prices down even more. Greece is going to the polls in a few days, and with many Greeks believing that the decision to join the euro is the reason for the downfall of the Greek economy, one thing is sure, a large number will vote for one of the extremist parties. Even though we will not know the next chapter in Greece's tragic destiny until we know the results of the elections, conversely, if the Greek election results are interpreted as bad news by the markets, eurozone instability will increase. What's more, an exit of Greece from the Eurozone will have a disastrous effect on the markets and the resulting recession would expect oil prices to dive further.
Spain, which is the Eurozone's fourth largest economy has just had its rating downgraded by Fitch. On the 10th of June an emergency bail-out package of 100 billion euros was approved by a number of finance ministers from the European Union. Although precise details of the package have yet to be bashed out, the money will be used to finance the recapitalisation of Spanish banks. Spain is now the fourth country to be the recipient of a rescue package and this only serves to fuel concern over eurozone insecurity which has a knock down effect on oil prices.
Inflation: Gas High because Dollar Low
Of course speculation has and always will play a part in fluctuations of oil prices.
Even though all of the geopolitical factors stated above seem intuitively linked to the fluctuations in oil prices, they do not suffice to explain the decoupling of oil prices from prices at the pump, which are not going down. In fact the most likely reason for sustained high gas prices is not as much "geopolitical" as it is economical. Simply put, when the price of oil decreases, retailers often do not decrease the price of gasoline at the pump immediately. Downward oil prices present the ideal opportunity to sustain higher profit margins temporarily. It compensates for the times when oil prices are high and hence profit margins are low. Call it "testing the mean", "edging" ,"risk-factoring" or any glamorous name if you wish. It's a common practice of this and other industries.
One major component that separates gas price from oil price is the refining cost. Oil must be refined to become gasoline and the costs of operating refineries are directly tied to inflation. Inflation has been rising substantially dues in part to the rampant printing of money by the Federal Reserve. Evidently the refineries need to pass down to customers the ever increasing costs of the refinery process. Inflation feeds inflation.
Distribution and marketing costs also have a direct effect on prices at the pump. The evolution of these costs, like refinery costs, also correlates with inflation.
Blame Iran, Really
Naturally world geopolitics also have an effect on the price of oil as well as price at the pump. As of July 1st, 2012 the European Union will stop buying oil from Iran. Until then the European Union will buy 20% of Iran's oil exports. This embargo is in response to Iran's nuclear weapons policy as it is intended to act as an incentive for Iran to come back to the negotiating table where its nuclear weapons policy is concerned. However many analysts have predicted that this embargo is likely to wreak havoc, as Iran has repeatedly stated its intention to shut down the Strait of Hormuz, should these sanctions are enforced. The Strait of Hormuz, extensively covered by oil-price.net occupies a key strategic position as it is at the entry to the Gulf and 20% of the world's oil passes through it. Many analysts including ourselves have predicted that if Iran does carry out these retaliatory measures the price of oil will begin to rise dramatically.
So what will happen over the next few months? Is the price of oil poised to rise or will it continue falling? The fact that Japan is ready to approve a bill which would give sovereign guarantees for Japan's tankers which load Iranian crude oil is an indicator that prices may continue to fall. If the Japanese bill is passed this will undermine the effectiveness of the sanctions which will come into effect on the 1 July, and thus increase the amount of oil on the market, leading to further declines in oil prices.
Gas Prices Affect Consumers
Although consumers are hoping that if the price of oil does continue to fall, the price at the pump will eventually go down, in reality the pricing of gasoline can fluctuate independently from that of crude oil. For once it is likely that retailers will continue to make the most of any dip in the oil market to protect profit margins until a recovery takes place.
Inflation and a weak dollar are also a major component in the domestic cost of production and distribution of gasoline. While crude oil prices depend extensively on geopolitical factors, the price of gasoline is more subject to domestic factors such as inflation.
Published on 2012/06/18 by STEVE AUSTIN
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