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Are You Really Being ‘Gouged’ At The Pump?

Robert Rapier's picture
, Proteum Energy

Robert Rapier is a chemical engineer who works in the energy industry. Robert has over 20 years of international engineering experience in the chemicals, oil and gas, and renewable energy...

  • Member since 2018
  • 743 items added with 216,243 views
  • Mar 28, 2022

I have gotten a lot of questions recently about when we may see some relief at the gasoline pump. Complaints have grown in recent days, because oil prices tumbled after spiking, yet gasoline prices didn’t follow. Thus, the conclusion many have drawn is that they are being gouged at the pump.

There are several misconceptions involved in this reasoning. First, many attribute this supposed gouging to Big Oil. But the vast majority of retail gas stations in the U.S. aren’t owned by oil companies. Just because a station is branded doesn’t mean the station is owned by that oil company.

ExxonMobil, for example, has its name on lots of gas stations, but it doesn’t own any gas stations in the U.S. According to data from the American Petroleum Institute, the refiners that produce the gasoline own less than 5% of the retail gas stations in the U.S. More than 60% are owned by an individual or family that owns a single store. So, if you were being gouged, you are looking at the wrong culprit.

However, let’s look at the data. According to data from the Energy Information Administration (EIA), between the first week of December 2021 through the large price spike of early March — the average weekly price of West Texas Intermediate (WTI) increased by 70%.

The national average weekly retail price of gasoline, on the other hand, increased by 28% over that time period. You can see for yourself here. That suggests retail gasoline is still playing catch up to oil prices (although regional results may vary).

The average spot price of gasoline (link) increased by quite a bit more — 61% — in that time. But what these pieces of data tell you is that retail stations haven’t even absorbed the oil price increases since December. So, retailers and refiners may be making less money now than they were, due to their inability to fully pass on the price increases.

Oil producers are making more money for sure. But many people don’t differentiate between an oil producer, a refiner, and a retailer. They are all different parts of the supply chain. Historically, refiners and retailers often see margins erode when prices spike, because it is harder for them to pass on the full price increases.

Refiners and retailers tend to make more money when oil prices are falling. If you think gas prices shoot up quickly and come down slowly, you are correct. That’s a well known phenomenon called “rockets and feathers”, which several studies have attributed to consumer behavior (consumers are less discerning when prices are falling).

Bear in mind that the gouging issue comes up every time prices spike. And the investigations always conclude that the price spikes are rooted in supply and demand:

The bottom line is this: Gasoline prices haven’t tumbled because last week’s gasoline prices were not based on last week’s oil prices. Retail gasoline prices were still absorbing the oil price increases from the previous weeks. What we would have likely seen if oil prices hadn’t tumbled would have been another $0.25-$0.50/gallon price increase in gasoline over the next few weeks. Retail gasoline prices do not react instantaneously to spot oil prices. So you shouldn’t expect prices to tumble just because spot oil prices tumble.

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