Consumers See Some Relief at the Pump

A dip in demand and drop in global oil prices push average gasoline prices lower.

July 20, 2022

Customer Pumps Gas

ALEXANDRIA, Va.—Gas prices continue to fall, with the U.S. average retail gasoline price at $4.47 per gallon—the first time in nine weeks the average price has been below $4.50, according to AAA. Prices are falling due to a decrease in demand and lower global price for oil.

“Global economic headwinds are pushing oil prices lower and less expensive oil leads to lower pump prices,” said Andrew Gross, AAA spokesperson. “And here at home, people are fueling up less, despite this being the height of the traditional summer driving season. These two key factors are behind the recent drop in pump prices.”

According to new data from the Energy Information Administration (EIA), gas demand dropped from 9.41 million barrels per day to 8.06 million barrels per day last week, while total domestic gas stocks increased by 5.8 million barrels. The decrease in demand and declining oil prices have helped push pump prices down.

The reason for lower gas prices seems simple enough, but the fuels market is far more complex, and many consumers don’t comprehend the full story of how gas prices are set. It’s a common misconception that if the price of oil declines, gas prices should immediately follow suit. While fuel retailers know that this isn’t the case, oftentimes they are blamed for not dropping the price of gas quickly enough and are accused of making excessive profits off fuel.

The National Review reports that “the idea that gas-station owners are some sort of high-and-mighty titans of industry, rolling in cash while the rest of us languish, is nonsense.” Fuel retailers don’t like high gas prices either—they deter customers from shopping in store, which is where the higher-profit margins lie, not in fuel sales.

When crude oil prices rise, small businesses try their best to raise pump prices slowly so customers will still purchase fuel and hopefully enter the store to make a purchase.

“We really want to have and market a really aggressive price on the street,” Lonnie McQuirter, the owner of 36 Lyn Refuel Station, an independent gas station and convenience store in Minneapolis, told the Wall Street Journal in a recent article.

A NACS survey found that high gas prices are taking their toll on sales at convenience stores, with 59% of retailers saying their customer traffic has decreased in stores over the past three months. Nearly half of all retailers (49%) also say those customers coming inside the store are buying less compared to three months ago when gas prices were $1.50 a gallon lower.

In addition to the low fuel margins typically received from fuel purchases, retailers grapple with credit card swipe fees, which were up 25.6% in 2021. The fees cost c-store retailers a total of $13.5 billion.

Fuel retailers are also now caught up in a political debate on how to get inflation down. President Biden, who accused oil companies and refiners of profiteering from soaring gas prices, has tweeted that fuel station owners need to “bring down the price you are charging at the pump to reflect the cost you’re paying for the product.”

The president also recently tweeted out a chart showing the changes in the prices of West Texas Intermediate and gasoline over the last month with the text, “It’s time for gas retailers to pass the cost declines they’re feeling in the market onto American families at the pump.”

“Gas-station owners may make a convenient scapegoat for the pain Americans are feeling at the pump, but they’re not the real problem,” writes the National Review.

The National Review says many markets are characterized by what’s known as asymmetric price transmission, or “rockets and feathers,” meaning that when input prices go up consumer prices increase rapidly, but when input prices decline, consumer prices decline more slowly. The fuels market is one of those markets. The “why” of asymmetric price transmission is not as clear, and there isn’t an obvious reason in basic price theory why asymmetric price transmission should occur.

While there are multiple theories as to why rockets and feathers occurs, the “why of the phenomenon is a secondary concern in this context,” writes the National Review. “The bottom line is that it’s a great big complicated market out there, and Biden has done the world a disservice by pretending otherwise.”

NACS wrote a blog post on how to explain to customers why gas prices aren’t dropping quicker when the price of crude oil is.