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Biden says gas companies are overcharging Americans at the pumps

CLAIM: Joe Biden claimed on Tuesday, without evidence, that gas companies were overcharging Americans at the pump by failing to pass cost savings from lower wholesale gas prices through to prices at the pump.


Gas prices are not abnormally high compared to wholesale gasoline prices or crude oil prices. In fact, the ratios of wholesale gas to retail prices and crude oil to retail gas prices are both currently below their ten-year averages. This indicates that consumers at the pump are paying roughly what they would expect given the price of oil or the wholesale price of gasoline.

On Tuesday, the White House announced that the United States would release 50 million barrels of oil from the Strategic Oil Reserve as part of a ploy to lower the price of gas. The immediate market reaction was a 3.3% increase in the price of gas to over $ 82 per barrel.

Biden also claimed, wrongly, that Americans were overcharged by gasoline companies that did not pass on cheaper wholesale prices.

The price of gasoline in the wholesale market has fallen by around 10% in recent weeks. But the price at the pump has not budged a dime. In other words, the gas companies pay less and earn a lot more. And they don’t seem to be passing that on to consumers at the pump. In fact, if the difference between wholesale and retail gasoline prices were in line with past averages, Americans would be paying at least twenty-five cents less per gallon right now, as I speak. Instead, companies pocket the difference in the form of profit. This is unacceptable. And that’s why I asked the Federal Trade Commission to examine whether illegal and potentially anti-competitive behavior in the oil and gas industry results in higher prices for consumers. So we can ensure that the American people pay a fair price for their gasoline.

Historically, of course, there is usually some lag between wholesale prices and prices at the pump, which economists sometimes refer to as transmission delays. “Gas stations tend to gradually increase retail prices in response to increasing wholesale prices. Likewise, gasoline prices at the pump generally fall at a slower rate over time in response to lower wholesale prices, ”the Ministry of Labor explains in a 2015 article on the subject.

When prices fall, it can mean that gas station margins are widening. But the reverse is true when prices rise: it can squeeze margins.

“This delay in transmitting wholesale price changes to consumers typically results in lower margins during periods of rising crude oil prices and higher margins during periods of falling crude oil prices. The price of crude oil is volatile and large price changes take time to make their way through the refining and distribution sectors before reaching consumers, ”writes the Labor Department.

It is also true that price drops tend to be passed on more slowly than price increases. The exact reason why this is so remains a matter of debate.

Let us return to the Ministry of Labor for the competing explanations.

One explanation from the Association for Convenience and Fuel Retailing is that wholesale prices, local competition, and consumer behavior contribute to this behavior. Transmission delays caused by the time it takes to refine and distribute the product provide retailers with an additional layer of protection against short-term price shocks. In addition, price-conscious consumers and local competition can lead retailers to gradually adjust retail prices to avoid price shocks to consumers. Under this gradual pricing assumption, retailers receive lower margins when wholesale costs increase and larger margins when wholesale costs decrease. With this pricing approach, retailers can recoup lost profits on past increases in wholesale prices by delaying decreases in retail prices during periods of falling crude oil prices.

The second position, commonly referred to as the “rocket and feather” phenomenon, was recently noted by researchers at the Federal Reserve in St. Louis. This theory argues that wholesale price delays and imperfect local competition largely contribute to the difference in transmission speeds during crude oil prices rises and falls. Rising crude oil prices quickly drive up wholesale gasoline prices, and as a result, retailers are rapidly increasing their prices to preserve tight margins and maintain profits. This direct pass-through of wholesale price increases results in rapid increases in the retail prices consumers pay for gasoline. The speed of the increase is compared to that of rockets taking off. Conversely, during periods of declining crude oil prices, some retailers may maintain higher margins due to limited local competition and therefore have less incentive to pass lower prices on to consumers. This slow pass-through of price drops is compared to feathers slowly drifting to the ground.

What is important is that this is a persistent phenomenon and that it is caused by local competitive conditions. Under the rocket and feather approach, which most closely resembles President Biden’s perspective, gas station operators will be able to maintain higher prices in areas where they face less competition. . Thus, unlike Biden, they are not “gas supply companies” engaging in illegal or anti-competitive behavior.

If anything unusual or illegal happened now, it would show up in the ratio of wholesale to pump prices. But as the following graph indicates, there is no big change here. In fact, current prices at the pump are 1.28 times the wholesale price, slightly below the 10-year average of 1.34 times.

(This big spike in 2020 is due to the collapse in wholesale prices that took little time to trickle down to consumers.)

What about prices at the pump compared to crude oil? Again, the current ratio of 24.48 to one is slightly lower than the long-term average of 24.98 to one. In other words, a gallon of gasoline typically costs around 25 cents to the $ 10 price of a barrel of oil and now it costs a little less than that. Here’s the graph (and, again, you can see the crash associated with the pandemic).

Biden says gas companies are overcharging Americans at the pumps

In short, what is currently happening in gasoline prices seems normal given what we are seeing in world oil prices. The problem is probably not illegal or anti-competitive behavior by gas stations, but the inflation unleashed in global markets by the combination of delusional government spending, accommodating monetary policy and the anti-fuel policy of the United States. Biden administration.

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