When oil prices started to plunge a couple of months ago, it became obvious that car owners will start saving some money at the pump, but it wasn’t clear exactly how much they. Even though crude oil prices are the greatest factor that affects the price of gasoline, drops in oil prices are not always proportionally reflected in gas prices at the pump. For instance, the price of oil has been falling for several months, reaching $66 a barrel in December last year, a 35% decrease over the peak they reached during the summer, when a barrel of oil cost $102, but gas prices only fell about 24% during the same period.
This price difference between crude oil and the final product – gasoline, which can be quite substantial, is due to the fact that there are many additional factors that come into play when determining gas prices. Crude oil makes up anywhere between 50 and 60 percent of the price of gasoline, which is also affected by transportation costs, state and federal taxes, as well as retail margins added by gas stations. Additionally, the difference between supply and demand is also a major factor.
Crude oil is transported from the extraction locations to refineries, and then to gas stations, and these transportation costs are carried over to the consumer when filling up their tanks at the pump. Furthermore, gas taxes vary from one state to another, which are paid per gallon bought, instead of per dollar, and are not affected by oil prices. Also, gas prices differ largely between stations, depending on their location, taxes, and local demand.
With all this in mind, it should come as no surprise that gasoline is not falling as fast as oil is. Now, with the price for a barrel of oil falling under $50 for the first time in over 5 years, it’s only natural for consumers to expect a further drop in gas prices, but they should not hope for a dramatic decline, at least not immediately. While it is bound to get a bit cheaper, it will not happen over night, as gas stations are still selling gasoline that was derived from crude oil which was bought at a considerably higher price. This means that you can only hope to see a steeper decline in gas prices after a while, when stations will start selling fuel made from this cheaper crude oil.
The bottom line is that while retail gas prices are heavily dependent on crude oil prices, the price consumers pay at the pump will never really reflect the drastic decline in oil prices, because of the different market forces affecting the price of oil and wholesale gas prices. However, drivers can expect to save money at the pump over the next couple of months, just not as much as they had hoped in light of the record-low oil prices.