Oil Down 20%, Gasoline Down 8% – And This Isn’t a Bad Thing

Since July 11, the price of oil has fallen from an intra-day trading high of $147.11 to today’s closing price of $115.01 – a decline of 21.8 percent. During the same time frame, the price of gasoline has fallen from $4.09 to $3.78 – a decline of 7.6 percent.

On the surface, the slower decline of the price of gas should be cause for outrage – after all, nobody like paying this much to simply get around in their car or truck. However, things could certainly be a lot worse.

For example, we should count our blessings that the price of gasoline hasn’t followed the same path as the price of oil. Over the last 12 months, the price of oil is up over 65%, even when taking the recent decline. Over the same time, the price of gasoline is up only 36%.

Thankfully, as the price of oil quickly climbed higher starting in January of this year, it took a long time for the price of gasoline to start making a substantial climb upwards.

For example, in this graph provided by GasBuddy.com, you can clearly see that the slope for the price of oil is much more dramatic than that of the price of gasoline.

If the price of gasoline had mirrored the price of oil, we wouldn’t have been complaining about $4 gas this summer, because gas certainly would have hit over $5, and we’d currently be paying about $4.50 for a gallon of gas.

Much of what shielded us from $5 gas – namely, oil refiners – will be the main reason we likely won’t see a drastic drop in the price of gasoline over the coming weeks and months. This mainly due to the fact that someone had to “eat” the higher raw costs that weren’t being passed along to consumers. That someone was the oil refiners.

Oil companies knew that if they raised gasoline prices in step with oil prices – the price of oil accounts for roughly 75% of the price of gasoline – people would be forced to drastically cut consumption. (Which was something we started to see with $4 gas, so just imagine how much more pronounced our adjustments would have been had we seen $5 gas.)

Since the price of oil was determined by the market, and the price of gasoline was essentially being determined by what people were willing to pay before demand became squashed, the only place were oil companies could squeeze margins to account for the costs that weren’t being passed along was in the profit margins of refiners.

Now that the price of oil has eased a bit, these refiners aren’t going to be as willing to pass along the savings; after all, this is a business, and the financial goal of every business is to be as profitable as possible.

So, long story short – be happy with just an 8% drop in the price of gasoline because the lead up could have been a whole lot worse.

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