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  • Jonathan Poyer

The End of the Increase?

We spoke briefly about the oil market and inflation HERE. Briefly looking at the change in price of gasoline relative to crude oil prices, we noticed a sharp increase in gas prices followed by a quick flattening off. This is in despite of crude continuing to trade above $100.

I wanted to look at some charts and see what is going on with the gasoline and oil products leaving that previous post alone for now.

Many gasoline stations have only two or three days of product in stock, and so they price gasoline at what it will cost to refill those tanks underground. This is an economic term known as “replacement cost.”

U.S retail gasoline prices are generally determined by four broad elements: 1) the price of crude oil, 2) refining costs and profit margins, 3) retail and distribution costs and profit margins, and 4) taxes. Elements three and four compose the retail segment of the supply chain, and they tend to be relatively stable.

Crude oil is the main input cost in the production of gasoline, and changes in crude oil price, along with changes in gasoline market conditions, drive changes in wholesale and retail gasoline prices. The EIA estimates that about two-thirds of the price of gasoline at the pump is attributable to the refinery cost of crude oil. When the price of crude oil changes, the price of wholesale gasoline adjusts concurrently to reflect the increased refinery input cost, other market factors being equal.

Other factors equal, a $1/barrel change in the price of crude oil will result in a $1-per-barrel, or $0.024-per-gallon (1/42 of $1 because there are 42 gallons in one barrel) change in the price of wholesale and retail gasoline. Statistical analysis demonstrates about half of the change in crude oil price is passed through to retail prices within two weeks of the price change, all other market factors equal.

If you really want to take a deep swim in petroleum information and markets, have at it here:

So, let’s look at these oil and gasoline prices over time:

From 1986:

From 2008:

From Past 5-Years:

From 2020:

Stop right there! March 1st basically launches the price of gasoline sharply upward at the same time Brent and WTI prices have increased as well.

But why is the price of gasoline leveling off and even decreasing and why are Brent and WTI prices doing the same? Should not inflation be driving those things up, up, and up?

We saw this in 2014, we saw this in 2018, we are seeing this now. But this time, again, looking at the Dallas Energy Survey from March (HERE), we are not seeing the same response from investors as in the past. Nor are we seeing the same response from the producers both domestically and globally.

Investors are not buying the up and up this time. Money is not pouring into production. There is no optimism for E&P.

No, investors are holding back and producers know that they are holding back. There is a sharp risk-off view in these markets.

Even with oil above $100, there are not enough investments to increase production and not enough money willing to seek out the risks necessary for this sector of the market.

So how is the Fed responding? Welp….

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