Traditionally U.S. domestic retail gasoline prices tend to peak just before the July 4 holiday. This year, oil prices have been in decline since mid-May as the hostilities in the Middle East have eased.
Yet the decline in gasoline and diesel prices has been half that of oil prices.
We think that consumers and businesses should anticipate a slow drop in gasoline prices as distortions to global energy markets move toward a new and unsteady equilibrium over the next year.
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State of play
Since the April 7 peak of $112.95, the price of West Texas Intermediate has declined by 37.8%, to $70.38.
But the average price of domestic regular gasoline, which peaked at $4.56 per gallon on May 20, has fallen by only 15.3%, to $3.86. Diesel prices peaked on April 8 at $5.68 per gallon and declined by 14.5% to $4.85 per gallon.
With the price of wholesale gasoline prices 85 cents lower than the retail, a large move toward $3 per gallon should occur this year.
But don’t hold your breath waiting for that to happen.
More likely it will be later this year or early next year before that occurs.
So, what gives?
Stockpiles need to be replenished: First, stockpiles of domestic gasoline and oil have been depleted because of efforts to increase supply during the peak wartime distortions.
While the U.S. retains a strategic petroleum reserve for oil, it does not do the same for gasoline.
As a result, there will be a lag before gasoline prices head lower as inventories are replenished.
In addition, it takes time for retail gasoline distributors to work down inventory purchased at higher prices. Retail gasoline bought at $4 per gallon, for example, will not be sold at a loss, so expect gradual declines in regular gasoline and diesel prices.
Claims of price gouging, which grew more vocal during the price spike, are as wrong now as they were during the peak in oil and gasoline prices during the pandemic.
Unwinding jet fuel production: Second, during the peak of wartime disruptions, the 20% of each barrel of oil that would have been dedicated to producing gasoline was diverted to producing jet fuel for export, which was in severe shortage in March and April. In those months, U.S. jet fuel exports rose by more than 200,000 barrels per day.
While those exports have slowed, they cannot be unwound quickly, which will delay the full resumption of gasoline production.
Pricing dynamics: Finally, for every $10 that the price of oil declines per barrel, the price of gas declines by only $0.024 per gallon.
It’s an example of how commodity markets often work: What goes up will eventually go down, but not quickly.
While the U.S. exports more oil than it imports, making it more self-sufficient than other nations, the U.S. still relies on imports, and fossil fuel prices are set globally.
Until the U.S. further develops alternatives to oil like natural gas, nuclear, solar, wind and geothermal, true energy independence is still some years away.
