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Do Oil and Gas Prices Really Move in Tandem?

The conventional wisdom is that when oil prices are high, gasoline prices follow. Yet is that really true? Just recently, oil prices were up more than 9%, yet gas prices at the pump actually dropped 15 cents, to 3.30 a gallon. Why is this? Well, it turns out the conventional wisdom is mostly true, but gasoline prices do not follow oil prices perfectly, and each has its own reasons for prices rising and falling.

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First, why do gas prices tend to follow oil prices on an upward climb? According to one source, it is simply because when oil prices rise, gas dealers raise their prices in order to avoid losing money. At the same time, when oil prices go down, it can take anywhere from two days to three weeks for gas prices to fall. Another reason may have to do with the type of crude oil on the market. When crude oil is plentiful, but gas prices are still high, the reason may be because the crude is heavy and sour, which requires greater processing — as opposed to light, sweet crude oil, which is easier to refine.

If this is the case, then why do oil and gas prices sometimes vary? There are several reasons, most very specific to the way oil and gas are produced and to their intended purpose. While nearly half of crude oil — 42% — is used for producing gas, the other 58% is used for diesel fuel, jet fuel, and is even used to make everyday products such as tires. Therefore, the more demand for these items, the more the price of oil will be affected.

As for why gas prices rise and fall, the reasons range from the methods of production to the state of the economy. First, gas prices are affected by demand — when people travel in the summer, prices tend to go up. During the winter, with less travel, prices tend to drop. Second, there is not just demand for oil in the United States, but all across the world. China, India, and Brazil, all enjoying economic expansion, require more energy to keep their economies moving. Less oil means that it is more valuable, which increases the price of any product associated with it, including gas.

Third, gas is not just made of oil, but also of fuels meant to make gas cleaner burning. These fuels, such as ethanol, are often required additives, and their presence increases the cost of a gallon of gasoline. Even when all of these factors are taken into account, probably the biggest reason for gas’s continued high prices — even while oil prices remain low — is taxes. Taxes are imposed by both the state and federal government on every gallon you use, adding enormously to what you pay at the pump.

In short, high gas and oil prices are not part of some nefarious scheme cooked up by the oil industry to bilk consumers. There are a variety of reasons for oil and gas prices to be the way they are, mostly just having to do with the way each is processed. That said, if more oil and gas drilling were permitted, some of the pressures might be reduced, resulting in lower prices at the gas pump.

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