Oil’s Price Is Plunging, So Why Isn’t Gas Even Cheaper?

Oil prices have been plummeting. Why isn't gas even cheaper? Blame "rockets and feathers."

Oil prices have been plummeting. Why isn't gas even cheaper? Blame "rockets and feathers." David Goldman / AP

Economists call it the "rockets and feathers" phenomenon. Rockets zoom higher, but feathers float lower.

There's pretty wide agreement that gasoline prices seem to rise quickly when oil spikes, but they don't fall so quickly when crude crashes. There's little consensus about why.

The latest data point comes with the recent plunge in global crude oil prices; West Texas Intermediate has fallen from a summer peak of about $102 to just above $66 on Thursday. That's a 35.3 percent drop.

During the same period, the average price of a gallon of gasoline has fallen from $3.87 to $2.86—or just 24 percent. (Corrects percentage drop in gas prices.)

That lag in the price drop at the pump has a fairly simple explanation: The gasoline you buy today was made with crude oil bought when prices were higher. So it takes a while for the price savings to move through the supply chain.

Drivers call it "gasoline refiners and dealers getting greedy."

What's not so obvious is why prices seem to move faster to the upside when the price of crude oil rises. In technical terms, this is known as the "asymmetric, nonlinear pass-through of crude oil prices."

Drivers call it "gasoline refiners and dealers getting greedy."

Economists have studied the crude-gasoline price connection for decades. While they can't agree on the causes, many studies seem to confirm that the asymmetry is real.

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In 2010, a Federal Trade Commission study found that on average, retail pump prices rise more than four times as fast as they fall. The effect was more pronounced with branded gasoline than unbranded gas. And the "rockets and feathers" phenomenon was worse in Midwest cities than elsewhere in the U.S.

Different market forces

Researchers have sought to explain what's going on—with mixed success. One reason the two prices don't move in lockstep is that different market forces apply to crude and gasoline. Here's a sampling of the answers researchers have come up with:

Competition: When gasoline prices are falling, some gas stations hold onto higher prices simply because they can. In locations where there are fewer stations competing for your business, there's less pressure to cut prices, so they hold off as long as possible. That's harder to do when prices are rising, cutting into already razor-thin profit margins. (Gasoline retailers typically make only a few pennies a gallon on gas, booking the bulk of their profits from the snacks and soda sold inside.)

Clueless consumers: Clemson University economist Matthew Lewis theorizes that prices seem to fall more slowly, in part, because drivers remember the last price they paid when they filled up. In spite of those 6-inch-high numerals on top of the pump, they may be slow to realize prices are falling prices until they go to refuel.

Location: Though price changes are usually tracked using national averages, the price you pay varies widely from one pump to the next. Taxes, transportation costs, local supplies, changes in commuting patterns can all act independently on gas prices, which can amplify the impact of crude price runups and crashes.

That's why "it may not be surprising that we found more asymmetry at the local level than at the national level," according to economists at the St. Louis Federal Reserve.

The weather: Price changes also vary widely with the season. In much of the country, refiners have to produce different blends for summer and winter months. Summer fuel is more expensive. "During the winter, the rate at which gas prices are pulled down by oil prices appeared to be higher than it was during the summer," according to St Louis Fed researchers.

Taxes: When you top off your tank, you're paying for more than just the cost of the gasoline. In states where taxes are high, that can be a big part of filling up. When gas prices rise, you pay extra for the gas, When they fall, you still pay the full tax, which are levied per gallon rather than per dollar. So taxes skew the ratio between the price of gasoline and crude oil, researchers at the Cleveland Federal Reserve have noted.

Global demand: Until relatively recently, gasoline refined in the U.S. was sold only in the U.S. Though still a small share of production, the volume of U.S. exports is rising as U.S. demand has shrunk. That's helped cushion the downward price pressure from falling crude prices.