Gasoline "prices at the pump" go up and down and Oil "costs per barrel" go up or down, but they do so at different rates and even in opposite directions sometimes

Gasoline "prices at the pump" go up and down and Oil "costs per barrel" go up or down, but they do so at different rates and even in opposite directions sometimes.  We want to think that demand and supply controls prices where the cost of crude oil is set by the same economic conditions that determine the price of gas.  What are these mismatched trends telling us about how demand and supply work in the market?

To answer this question, first we have to understanding how gasoline is used(demanded) and produced(supply) is essential for comprehending the dynamics of supply and demand in the market. If we deeper dive into these aspects, we may better understand how they relate to the mismatched trends in gasoline prices and crude oil costs. Gasoline is primarily used as a fuel for internal combustion engines in vehicles, including cars, trucks, motorcycles, and boats. Therefore, fluctuations in gasoline demand are closely tied to factors such as vehicle ownership, driving habits, and economic conditions such as transportation. Industrial and commercial applications, such as generators and small engines, are also need gasoline.

In addition gasoline also serves as a feedstock or raw material for the production of various goods and chemicals. This application of gasoline is primarily associated with the petrochemical industry. Gasoline is a source of hydrocarbons, and it can be further processed to extract valuable petrochemicals. These petrochemicals serve as building blocks for the production of a wide range of products, including plastics, synthetic rubber, solvents, detergents, and chemical intermediates used in the manufacture of pharmaceuticals, textiles, and more. The petrochemical industry plays a pivotal role in transforming gasoline and other petroleum products into a wide array of valuable materials and products that are integral to modern life. The demand for these petrochemicals can be influenced by economic factors, technological advancements, and shifts in consumer preferences, further affecting the overall dynamics of the gasoline market. 

Now, let’s talk about the “supply” side of gasoline. The supply side of gasoline involves the production and discovery of crude oil, which is the primary raw material used to produce gasoline. Oil companies use geological surveys, seismic studies, and other techniques to identify potential oil-bearing areas. Once a promising location is identified, exploration wells are drilled to assess the presence of crude oil. If a well indicates the presence of crude oil, production wells are drilled to extract the oil. 

Crude oil is processed at refineries to separate it into various petroleum products, including gasoline. The refining process involves distillation, cracking, and other chemical processes to break down the crude oil into its component parts. After production, gasoline is transported to distribution terminals and then to individual gas stations. These stations store and dispense gasoline to consumers. When gasoline is ultimately sold to consumers at gas stations, the retail prices may vary based on factors like location, taxes, competition, and operating costs. Moreover, since crude oil and refined petroleum products, including gasoline, are traded globally, changes in international supply and demand, geopolitical factors, and currency exchange rates can impact the availability and pricing of gasoline in different regions. 

As we can see that he supply of gasoline is closely tied to the supply of crude oil, as gasoline is a product derived from crude oil through the refining process. Therefore, fluctuations in crude oil production, exploration, and transportation can have a direct impact on the availability and pricing of gasoline in the market. Additionally, geopolitical events like Russia invaded Ukraine and economic conditions can influence the supply chain at various stages, further affecting the supply side dynamics of gasoline.

Now, let’s summarize the demand and supply of gasoline to get our answer. First of all, gasoline must be transported from refineries to distribution points and then to gas stations. Factors like transportation costs, disruptions in supply chains, and logistical challenges can affect gasoline prices independently of crude oil prices. Secondly, gasoline is also subject to environmental regulations that can vary by region. Different regions may require specific gasoline formulations, which can affect production costs and supply. Thirdly, changes in consumer preferences toward more fuel-efficient vehicles or the adoption of electric vehicles can affect gasoline demand. Similarly, innovations in engine technology and alternative fuels can influence demand patterns. In essence, the mismatched trends between gasoline prices and crude oil costs highlight the intricate interplay of supply and demand factors throughout the entire gasoline production and distribution chain. These factors can diverge from the fluctuations in crude oil prices due to the complex interactions within the market and the influence of various external factors, as outlined above. 

The mismatched trends between gasoline prices at the pump and oil costs per barrel can be attributed to several factors that affect the pricing dynamics. Changes in oil costs per barrel may not immediately reflect in gasoline prices at the pump. There can be a time lag between changes in the cost of crude oil and adjustments made by gasoline retailers. This lag can be influenced by contractual agreements, inventory levels, and pricing strategies employed by oil companies. In addition, gasoline prices are not solely determined by the cost of crude oil. They also include costs related to refining, distribution, taxes, and marketing. These additional costs can fluctuate independently of crude oil prices and contribute to the mismatched trends.

Gasoline prices can be influenced by competition among retailers in a particular area. In regions with more competition, retailers may absorb some of the fluctuations in crude oil costs to attract customers, leading to slower or less pronounced changes in pump prices. Government taxes on gasoline are also a significant component of the price at the pump. These taxes can remain relatively stable or increase even as crude oil costs decrease, leading to a divergence in trends. Moreover, consumer demand for gasoline may not always respond immediately or proportionally to changes in gasoline prices. People may continue to consume fuel at similar rates despite price fluctuations, especially in the short term. Furthermore, financial markets and speculative trading can introduce volatility into oil prices, leading to rapid and sometimes unpredictable changes that may not align with underlying supply and demand fundamentals.

Overall, to understand these concept, you can image that you are one of the oil providers or consumers. When the oil supply anciently increase, what would you do? You may not immediately become aware of such changes. You just use your car and consume petroleum products as usual. Then, you begin to see more and more gas stations start to put on lower and lower price tags. At this time, you begin to think about changing your consumption. Similarly, when you are running an oil company, increasing significant amount of supply, is not an easy task. You have to carefully monitoring whether the demand is actually increasing in the long term, so you can start such investment. As you can see that the consumers and the producers are not always changing their mind as quick as possible. Moreover, we are making such choices at the margin, rather than completely down to zero, and our choices are not always sensitive and simultaneous to the prices.

In summary, the mismatched trends in gasoline prices and oil costs demonstrate the complexity of energy markets. While supply and demand are fundamental drivers, other factors, including taxes, distribution, market sentiment, and geopolitical events, can lead to temporary divergences between the two. The demand and supply model provides a useful framework, but real-world markets are influenced by a wide range of variables that can cause prices to move differently and sometimes in opposite directions.

Reference

Competition in Roadfuel - OECD.org - OECD. (n.d.-a). https://www.oecd.org/competition/CompetitionInRoadFuel.pdf 

Khan Academy. (2012, January 2). Market equilibrium | Supply, demand, and market equilibrium | Microeconomics | Khan Academy [Video]. YouTube.

Open and free content on JSTOR and Artstor - about JSTOR. (n.d.-b). https://about.jstor.org/oa-and-free/ 

Petrochemical Industry. Petrochemical Industry - an overview | ScienceDirect Topics. (n.d.). https://www.sciencedirect.com/topics/earth-and-planetary-sciences/petrochemical-industry 

Rittenberg, L. & Tregarthen, T. (2009). Principles of Economics. Flat World Knowledge.

U.S. Energy Information Administration - EIA - independent statistics and analysis. Refining crude oil - the refining process - U.S. Energy Information Administration (EIA). (n.d.). https://www.eia.gov/energyexplained/oil-and-petroleum-products/refining-crude-oil-the-refining-process.php 

U.S. Energy Information Administration - EIA - independent statistics and analysis. Regional gasoline price differences - U.S. Energy Information Administration (EIA). (n.d.). https://www.eia.gov/energyexplained/gasoline/regional-price-differences.php