Crude Oil Prices Are Plummeting, but Gas Pump Prices Stay High

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Gas prices are plastered in giant numbers on every third street corner and are the most visible victim of inflation. We see them with our eyes and feel them with our wallet.

The price of crude oil is starting to fall. Gas stations are happy. The current state of gas and oil is a fascinating case study.

Fall Like a Feather, Sting Like a Bee

The West Texas Intermediate, a benchmark for crude oil prices, is down more than 20% since a mid-March high, with oil barrels trading at less than $100 for nearly a week in the US. That means gas prices are falling too. Very slowly.

The phenomenon is called the rockets-and-feathers phenomenon. When crude oil prices go up, gas prices go down, just a couple of days behind. When crude oil prices go down, gas prices go down as well. The phenomenon explains why gas stations prefer falling oil prices.

• As gas prices rise, consumers will look far and wide for the cheapest pumps. In return, stations are incentivized to keep consumer rates low even as their own costs soar. But when prices begin to fall, drivers drop their bargain-hunting and settle for saving a few bucks at the nearest station.
• Even as costs tumble, gas stations, in turn, collectively slowly lower pump prices in what economists call "tacit collusion"-- it's the feather slowly falling. Profit margins balloon, according to Oil Price Information Service data reported by The Washington Post: In March, as oil prices soared, gas stations earned $0.35 for each gallon sold; this past week, they pocketed $0.55 per gallon.

In the early days of the Pandemic, profit margins were very high, even though demand for gas was low. At one point, stations sold more gas for less than they cost. We never thought we would say so, but the low gas prices make us nostalgic for the early days of the Pandemic.