Disconnect Between the Price of Crude and the Price of Gasoline

Drop in oil price could bring little relief at the pump

By Cezary Podkul, Published: August 12, The Washington Post
Arthur Horsey had already spent $200 on gasoline this week before he pulled up to a Sunoco gas station in Rosslyn on Friday to refill his white Chevy van. He was only planning to spend another $20, but with gas at $3.69 per gallon, the independent courier had to pay $50 to get him where he needed to go.

“Doing this type of work, gosh, man, that’s what you need is small prices so you can see a little profit. Right now, it’s not much profit,” he said. “Gas is taking it right away.”

Like many struggling Washington area residents, Horsey is hoping that the plummeting price of oil, down about 25 percent from May’s peak of $113.52 to about $85 a barrel Friday, will ease prices at the pump and let him keep more money in his wallet.

But those savings are unlikely to be big. Unlike in years past, when the price of oil and the price of gas moved closely in tandem, in 2011 the relationship between the two has been murkier. Oil prices have fallen precipitously, but District residents are still paying $3.83 per gallon of regular gas on average — 22 cents above the national average and only 9 percent less than the District’s all-time high of $4.21, according to the American Automobile Association.

“What we’ve seen for the first time in recent memory is this disconnect between the price of crude and the price of gasoline. It’s almost like it’s moving in its own orbit,” said John Townsend, spokesman for AAA of Mid-Atlantic.

The disconnect could pose another headwind to the U.S. economy, because higher gas prices typically translate to less money that consumers are able to pump into the economy. “Extra money would be helpful,” Horsey said as he filled up his van. “I could finish my deck in the back of the house.”

The usual rule of thumb is that a $10 dollar decrease in the price of oil translates to about a 25 cent per gallon decrease at the pump. With oil down nearly $30 from its May peak, that should be about 75 cents. But the difference for District residents is only about half that. “We should be paying much lower for gas,” Townsend said.

Analysts blame some of the disconnect on the country’s increasing reliance on foreign oil, which is priced higher than the main domestic benchmark, the West Texas Intermediate Oil future. As of Friday, West Texas crude cost about $22 less than its major foreign counterpart, the U.K.’s Brent Crude future.

“As a result, the price of oil that we see in our screens every day is not representative of the price of oil that most Americans pay for their fuel,” said Pavel Molchanov, an oil analyst with investment bank Raymond James in Houston. So even though the price of the West Texas crude has fallen to about $85 a barrel, a level last seen before February’s price spike, “the consumer, sad to say, doesn’t see those savings,” Molchanov said.

It can also take time for cheaper petroleum to work its way through the distribution system. And the global economic slowdown is reducing demand for oil, which is putting further downward pressure on gasoline prices.

“If crude stays flat at this level, you’re going to pay 35 cents a gallon less than you did three weeks ago,” said James Williams, an oil analyst with WTRG Economics on London, Ark.

The end of the traditional summer driving season on Labor Day could bring down demand for gas, driving prices even lower. So could a recession, Williams said. “The only problem is, without a job, it doesn’t matter what the price of gasoline is, because you can’t afford it,” he said.

Back at the Sunoco gas station in Rosslyn, some motorists are making do with the high prices. Emma Hobson Feltus drove from Maryland to fill up before taking off on a weekend trip to a friend’s farm, and she borrowed her brother’s more fuel-efficient vehicle to make the trip. “My car is much more of a gas guzzler and that definitely has a big impact on my budget,” she said.

Others are simply resigned to paying more. “I’m not going to not get gas,” said Sarah Tidd, a hairstylist from Quantico. “I just pay it.”


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