The Car and Truck Fleet and Leasing Management Magazine

Gasoline Prices Have Dropped 54 Cents in Past Six Weeks

September 22, 2006

WASHINGTON, D.C. --- The Energy Information Administration's (EIA) weekly U.S. average retail price for regular gasoline has fallen by 54 cents per gallon in just six weeks. That includes a 12-cent decline in the past week. This is already the second-largest uninterrupted decline in the history of the survey (dating back to August 1990), trailing only last year's nine-week, 78-cent drop after Hurricane Rita, the EIA said. Some analysts have predicted that average U.S. prices will drop near $2 per gallon or lower, and prices under $2 have already been reported in a few locations. So how low will gasoline prices get? "In order to understand where retail gasoline prices might be headed, we need to look at the various components behind the price consumers see at the pump," the EIA explained in its newsletter released this week. "First, and most visible, is the price of crude oil, which has also fallen sharply (over $13 per barrel, or about 31 cents per gallon) over the same recent period. Secondly, the so-called "crack spread" between crude oil and spot market (approximately "refinery gate") prices for gasoline, which typically drops at the end of the driving season, has fallen more sharply than usual since early August. Finally, distribution and marketing costs and profits, along with taxes, round out the major components of retail gasoline prices." Crude oil and gasoline have a "push-pull" relationship. Falling crude oil prices can pull gasoline prices down, and falling gasoline prices can push crude oil down. The same forces work in the other direction when prices are rising. Crude oil prices depend on the global balance between supply and demand, which is often influenced by geopolitical or natural events. Also, the price of gasoline relative to crude oil is a major factor in the profitability of refining. The size of that spread influences whether refiners will demand more or less crude oil, which in turn influences its price. "Both factors have come into play during the past six weeks, as crude oil prices have eased due to a perceived reduction in threats to global supply, and the end of the driving season has magnified the drop in gasoline prices. The latter reflects a decrease in the gasoline crack spread from historically high levels this summer to unusually low levels by mid-September," the EIA reported. Beyond the refinery, taxes add the largest increment (about 46 cents, on average this year) to retail prices. The remainder depends on the distribution and marketing functions. The amount available to cover the costs and profits of distribution and marketing varies as prices rise and fall, but averages under 20 cents per gallon. Keep in mind there is a lag between wholesale and retail price changes. In general, marketers tend to make less profit as wholesale prices rise while retail prices lag behind, but make more profit as prices decline. So what does this breakdown suggest about the near-term prospects for retail gasoline prices? The EIA added: "Reductions already seen in spot and futures markets could imply a further decrease in the U.S. average retail price of as much as 25 cents (to around $2.25 per gallon), if those wholesale markets don't turn upward in the interim."
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