If crude oil prices fall why would gasoline prices remain high?

Question

If crude oil prices fall why would gasoline prices remain high?

Answer 1

Crude oil prices is an input of production of gas at the pump.  the main reason there is a discrepancy between the fluctuations in the price u pay at the gas station and crude oil commodity price is because of the time lag.

take this example:  On Monday crude oil price is $100 USD per barell

I the gas station operator buy 1,000 barrells on monday @ $100 USD each of gas which usually lasts me one week.

Now it's Wednesday and the crude oil price has gone down to $80 USD per barell.  Even though this may have occured for me as the gas station operator, my cost of gas is still 100 USD per barell and so my gas price will remain high until i get rid of that supply of gas.  If i am forced to drop my price then my profit margin will erode.  Come next Monday if the gas price is still $80 USD per barell.  Then i am able to drop my price down, but until then i will try to maintain my margin the best i can.

This is generally the case in an efficient market. And most likely the case in your country.

To some extent people may consipire that gas station operators are price fixing and ripping off customers, and in isolation this may occur, but when you look at the market as a whole i think the scenario explained by time lagg is more apparent.

Hope this helps with your query

Answer 2

Gasoline is an example of processed oil , while crude oil is raw material .SO, even if crude oil prices fall , the gasoline manufacturer tends to increase it's price to earn more profit . SINCE , he is selling a product he has the right to fix whatever price he feels comfortable with .