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FAQ / Why dont fuel prices change as quickly as crude oil prices?


The cost of crude oil is a major component in the price of diesel fuel, gasoline, and heating oil. But there are other factors that affect retail fuel prices. Prices are determined by demand and supply in our market economy. Fuel demand is affected mainly by economic conditions, and for heating oil, the weather. Supplies come from refinery production, imports, and stocks (inventories.)

Suppliers price their products based on actual and expected demand relative to available and expected supplies over the short and longer term. Since stocks are the main buffer between short term demand and supply, stock levels are a major factor in fuel pricing.

Reductions in fuel supply, especially when demand is high, can cause prices to increase and to remain high even if crude oil prices drop. On the other hand, even if crude oil prices are increasing, retail fuel prices may not increase as much, or may even fall, if existing and expected fuel supplies are high relative to demand. The rise and fall of crude oil and gasoline prices over the past year help to illustrate these points:

Retail gasoline prices increased an average of 82 cents per gallon more in the first 7 months of 2008 than in the same period in 2007, while crude oil prices increased by 119 cents per gallon. Adequate supplies and slowing demand for gasoline meant that much of the crude oil price increases were not passed on at the pump.
High prices caused people to buy less gasoline, and gasoline and crude oil prices began falling in mid-July.
In September, Hurricanes Ike and Gustav caused several Gulf Coast refineries and a major gasoline pipeline supplying the Eastern U.S. to shut down. These significant supply disruptions drove gasoline prices up in many areas of the country for several weeks, even as world crude oil prices were dropping.
As of mid-October, the supply situation improved and gasoline prices began falling along with oil prices

 




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