Gasoline prices, which had drifted lower for the past three months, have now reversed, rising to a national average of $3.79 a gallon over the past week, according to the American Automobile Association. Last week, at a meeting of the White House Competition Council, President Joe Biden intimidated oil companies and gas dealers, telling them, “Lower the prices you charge at the pump to reflect the cost you pay for the product.” Do it now . Do it now. In less than a month – do it now.”
Well, at least the President has implicitly acknowledged that there is a correlation between the cost of crude oil and the price of gas at the pump. In fact, the correlation between the two is quite close. Essentially, if the price of a barrel of oil goes up $10, the price of a gallon of gas goes up by 25 cents, according to the St. Louis Federal Reserve Bank.
To see the correlation between oil and gasoline prices, let’s take a look at two charts. The first is from The real economy blog Economist Joseph Brusuelas.
The second chart is from the US Energy Information Administration.
So what has happened to the price of benchmark West Texas Intermediate (WTI) crude oil over the past few weeks? It rose to around $87 from a recent low of around $77.
Unsurprisingly, prices at the pump also apply. But the $10 a barrel surge has resulted in a rise of more than 25 cents at the pump. Blame “rockets and feathers”. As the St. Louis Federal Reserve Bank explained in a 2014 report, when they see crude oil prices rising, gasoline dealers raise their prices quickly (quickly) to maintain their profit margins. However, as consumers have become accustomed to higher prices, retailers generally reduce prices (springs) more slowly when crude oil prices fall. The study found that retail prices tended to fall faster when competing gas stations were close together.
Remember when Biden went to Saudi Arabia in July to plead with that murderous regime to increase oil production in order to drive down global oil prices? Now the Saudis and other members of the Organization of the Petroleum Exporting Countries (OPEC) are paying back his flattery by planning to cut production by 2 million barrels a day from November. Other issues are contributing to the recent rise in gasoline prices, including the fact that several West Coast refineries have been shut down for maintenance and expectations that more Russian oil will be withheld from world markets.
Bottom Line: It’s very likely that gasoline prices will “skyrocket” this fall.