Why Are Gas Prices Going Up When Demand Is Going Down?


The price of crude oil—and, more important, gasoline—has climbed to painful levels once again. As of early April, the quote for Brent crude, the international yardstick, was about $126 a barrel—only some $16 below the $142 peak seen in the summer of 2008. But domestic West Texas Intermediate (WTI) crude is only getting $107 a barrel—a full $38 below the 2008 peak. Meanwhile, we are told that U.S. oil production is up, gasoline demand is down, and we are even exporting gasoline to foreign countries. So why is the price of gasoline, at an average of $3.84 per gallon for regular, according to the U.S. Energy Information Administration, within five percent of the 2008 peak when domestic crude is fully 26 percent lower?

It’s easy to imagine oil-company conspiracies when seeing these figures. But as usual, the truth is a bit more complicated—and less satisfying. As the chart below shows, the price of at the pump does move in concert with crude-oil prices, although the proportionality between the two varies with market conditions. According to John C. Felmy, the chief economist for the American Petroleum Institute, since 1968, the retail price of gasoline has averaged about $1.17 above the price of a gallon of crude oil (in 2012 dollars). That figure includes the average state and federal taxes of about 49 cents (varying from 26 cents in Alaska to 67 cents in California, Connecticut, and New York), the cost of refining the crude into gasoline, the transportation and distribution costs, and the refiner’s profit.



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