Should We Be Paying Less At The Pump?

Low oil prices may have translated to lower gasoline prices for consumers, but the drop is not nearly as great as consumers probably should be seeing. A Florida television station had me on its Sunday morning show this past weekend to explain the current oil headlines. The questions turned toward the price at the pump. It got me thinking: has the consumer really seen a sufficient benefit from low crude prices? If not, why not?

The average price of oil in September 2014 was $97/barrel, and the average price of gasoline was $3.33/gallon. At the end of January 2015, the price of a barrel of oil was about $30/barrel, and the average price of gasoline in the United States was $1.97/gallon. This means that the price of crude oil today is 31% of what it was in September 2014, but the price of gasoline at the pump is 60% of what it was in September 2014. If the price of gasoline had dropped at the same rate as crude oil has dropped, we would be paying only $1.03/gallon today.

A few critical factors prevent gasoline from dropping as much as crude oil, including the costs of refining, transportation, and ethanol mixing. Ethanol mandates are probably responsible for most of the “sticky” prices effecting gasoline pricing. A lack of refining capacity is also exerting significant upward pressure on gasoline prices. Consumers may be happy with the drop in gasoline prices, but policy makers should seriously consider how much lower the price at the pump would be if the ethanol mandate was vacated and we had increased refining capacity.

Similarly, low oil prices have not significantly translated into other aspects of the consumer economy. Particularly, costs in food prices, airline fares, and other forms of transportation all rise when crude prices are high, but we do not see corresponding drops when crude plummets. The primary explanation for the continued high prices of food, airfare, etc. is that these prices get locked in by their vendors when oil is high and consumers become accustomed to new, “inflated” prices. There is also an argument that if gasoline dropped at the same rate as crude—if ethanol mandates and low refining capacity did not get in the way—we might see slightly lower food prices and airfare than we see today.