WeForNews | Latest News, Breaking News, News Updates Why don't gas prices fall? | WeForNews | Latest News, Blogs
Connect with us

Business

Why don’t gas prices fall?

Published

on

Since the price of crude oil started to tumble in June 2014, almost $80 has been wiped off the cost of a barrel of oil from the peak to the trough of oil market indices.
As a barrel of oil represents 42 gallons, that price fall works out at about $1.60 per gallon. However, the pump price of a gallon of gasoline only decreased by $1.20. Why?

Oil-price.net investigates the reasons why drivers aren’t benefiting from lower crude oil prices. Economic concepts of the inelasticity of demand, the price the market will bear and supply shortages all seem to have played a role in preventing gasoline prices from falling in line with crude oil.

Crude Oil Indices

Crude oil price changes are registered by two indices. The West Texas Intermediate (WTI) is used by the North American oil industry and the Brent Crude Index is used by the rest of the world.
Generally the Brent Crude price is a little higher than the WTI. US oil refiners deal with both the WTI and the Brent price because they buy crude oil from the US and Canada and also from other regions in the world, such as the Middle East. However, both indices have fallen sharply over the last year, which means that crude oil has gotten cheaper. Historically, the price of gas at the pump tends to move in the same direction as the Brent price, rather than the WTI index.

Price Changes

The WTI oil price peaked at $105 per barrel in June 2014 and fell to a low of $44 at the end of January 2015. The Brent crude oil price peaked and troughed on the same dates, falling from a high of $112 per barrel to a low of $45 per barrel in January 2015. The price didn’t fall in a straight line, but the overall trend continued downward.

Both indices rallied a little, fell back and then peaked again at $66 for Brent and $61 for the WTI in June 2015. The price has fallen again since and analysts including oi-price.net expect the two indices will remain between the $45 and $60 range until the end of the year. There aren’t any prospects of the price of crude oil rising until 2016.

Price Justification

A retailer may argue that price falls do not feed through to the consumer immediately because stock bought at high prices has to be sold off and lower prices will only kick in once the retailer is able to restock at cheaper rates. However, the price has been considerably lower than the peak for the entirety of the first half of 2015 and pump prices haven’t reflected the new normal of lower crude prices.

Another argument a retailer might give for not adjusting prices lower lies with the expected duration of lower prices. If a dip in the supply price for a commodity is only expected to last a short while, the retailer may justifiably claim that it isn’t worth adjusting all prices lower, only to hike them back up again when the price anomaly ends. However, the low crude oil price has become embedded long enough for this justification to be invalidated.

The fact is that the price of gasoline at the pump has fallen over the past six months, but not by as much as the crude oil indexes.

Gas Pump Prices

Although gas companies passed some of the early falls in the price of fuel to their customers, they exploited the rise in the price of crude oil in February to increase pump prices again. In fact gas prices rose back in March above their mid-December levels, even though the price of a barrel of crude on the Brent index was $8 cheaper, at a rate of five times the rate at which crude oil prices were rising. The price of crude then took a downward turn after that date, while the pump price of gasoline and diesel continued to rise.

The highest historical average pump price for gasoline this century occurred in July 2008, when the price hit $4.06 per gallon. The peak in 2014, occurred in June of that year, at $3.69. Pump prices fell along with the fall in crude oil prices, bottoming out in January 2015 at a price of $2.11 per gallon for gasoline. Brent peaked at $62 in February 2015 and the average US pump price for gasoline rose to $2.21 per gallon. However, as the Brent crude index fell back in March, the pump price continued to rise. By May 2015 it had reached $2.71 per gallon, while the Brent crude recovered a little to $65 per barrel.

The pump price of gasoline has risen with the price of crude during 2015, but did not fall with the intervening dips in the Brent crude index during the year.

Confounding Factors

The pump price of gasoline disconnected from the Brent crude index price of oil in March 2015. While crude oil prices fell, gasoline pump prices rose. Here are some reasons why:

Crude oil gets turned into gasoline by refineries and although the demand from gasoline users should drive the price, the refineries can distort the price of both crude oil and gasoline. A number of US oil refineries suffered industrial action in February, cutting their output right at the time that New England, America’s most densely populated region, encountered freezing temperatures.

The effects of the strike caused a rise in the price of heating oil in late February and a similar rise in automotive fuel prices at the beginning of March.

Prices are set by supply and demand. The crude oil market is currently over-supplied, which depresses the price. Reduced throughput at America’s refineries caused the supply of heating oil, gasoline and diesel to fall below demand, causing the prices to rise.

When refinery capacity is reduced, demand for crude oil falls and oil producers have to send their output to storage. This year’s strike action occurred at a time when the world crude oil production already exceeded demand, so that put pressure on the price of storage and cut the price of oil for immediate delivery because no one had any space left to hold it.

Lower production occurred just at the time when demand for oil from domestic heating and power stations was at its greatest, causing a shortfall in supply that also impacted the gasoline market. Where there are shortages, prices will rise. So strike action at US refineries caused crude oil prices to fall and gasoline pump prices to rise.

Refinery Capacity

The effects of refinery shut downs are becoming progressively more severe each year because refining capacity in the USA hasn’t expanded over the past decade in line with economic activity. This gradual tightening of capacity gives any closure greater impact on the price of gasoline.

The main reason the oil companies are not expanding their facilities is that idle refineries represent a lot of capital tied up without producing any income. By setting their throughput capabilities at maximum demand without room for outages, the oil industry is able to improve utilization, increase return on investment and maximize profits. This strategy means that refineries become bottlenecks during maintenance periods.

The green consumer and happy homeowner compound the problems of refinery shortages. The investment, planning and inquiry phases of building new refineries are becoming increasingly fraught. Everyone wants new refineries built … just in someone else’s backyard. Environmental opposition makes the siting of new refineries close to population centers with high demand for gasoline difficult to achieve. So higher gas prices are a sort of a tax. They are the price consumer pays in order to enjoy a cleaner environment. US drivers could be paying less for gas, but in reality they are perfectly happy paying a few cents more for gas in order to have less environmental hazards around their homes, and fewer birth defects than China.

Scheduled Maintenance

You may not realize it, but without switching brands or grades, you put a different blend of gasoline in your car in the summer to the blend you drive on in the winter. Refineries produce a winter blend and a summer blend of gasoline. Peak heating oil season runs through to February and peak driving season picks up from June, so oil refineries schedule their change over to occur between March and May.

The refineries don’t all switch over at the same time. Some will start the switch in March, others leave it until May. However, each refinery will experience a partial or total shutdown during the turnaround. This results in less gasoline available on the market, and, therefore, higher pump prices.

The rise in gasoline pump prices happens to varying degrees every spring. The peak of this maintenance-fueled price rise usually occurs between May 9 and May 24. The rise is usually more severe if unexpected factors occur, and this year had two of those surprises – an exceptionally cold winter and a worker’s strike ran gasoline stocks low.

The turnaround from winter blend to summer blend is very expensive and complicated. They are often scheduled about two years in advance and the refineries do not postpone or cancel their plans because of price-exacerbating factors.

In 2009, the price of gasoline rose by 42.2 percent between February 2 and a peak on June 22. In 2010 the rise was only 9.2 percent measured from February 1 to its peak on May 10. Lower refinery capacity accounts for the price rises that occurred from March to May. Crude oil prices started to fall again at the beginning of July, so, now that the turnaround season has finished, gasoline prices should start to fall again.

Other Pricing Factors

By our calculations, 51 per cent of the price you pay for gasoline derives from the price of the crude oil that went into making that fuel. The refining process accounts for 23 per cent of the gas gallon price, while transport and retail margins add 8 per cent and taxes account for 18 per cent of the price.

Those figures are averaged across the country, however. Different states levy different levels of tax and different locations cost more for premises and so add on costs for the retailer. So those living in San Francisco pay more per gallon than people who live in Austin.

Prospects

As previously mentioned, our oil price analysts do not foresee any major rise in the price of crude oil right through to the end of the year. So far this year, the price of a barrel of crude on the Brent index has gone from a low of $45 in January, up to around $60 through February and March, down to $52 in mid-March and up to around $65 through May and early June. The price fell again down towards $55 in early July.

When analysts say they expect crude oil to be at $45 to $50 by the end of the year, that doesn’t mean that prices will fall constantly from $55 to $45 in a straight line over the second half of 2015. Market sentiment, or panic, can temporarily raise crude prices above that line. Gluts and storage shortages will knock the price below that line.

Gas stations are unlikely to lower and raise their prices exactly in synch with the crude oil price. They tend to bridge over the dips, which means they leave their prices where they are for a few weeks to see whether the price of crude will rise. If it doesn’t, they may shift their prices downward.

Despite the price smoothing performed by gas stations, the general trend in gas prices will be lower over the second half of 2015. Thus, the temporary price hike caused by lower refinery capacity will age out of the price and reappear in March of 2016.

Demand for gasoline is relatively inelastic, which means rising prices don’t tend to lower sales turnover. Consumers are happy with any price fall, no matter how small, but resent price rises. This factor makes gasoline retailers more likely to push up prices quickly with any increase in costs to get the pain over with quickly. They squeeze as much kudos from their customers with any supply price decrease by reducing pump prices in smaller, graduated steps. In other words, people are charged what they are willing to pay for gasoline, not what it costs.

 

source : http://oil-price.net/

Continue Reading
Advertisement

Business

Petrol, diesel prices remain unchanged at record high levels

Published

on

By

File Photo

Retail fuel prices were unchanged on Sunday across the four metros. On Saturday, petrol and diesel touched fresh all-time high levels.

In the national capital, petrol was priced at Rs 85.70 per litre. In Mumbai, Chennai and Kolkata, petrol was sold at Rs 92.28, Rs 88.29 and Rs 87.11 per litre, respectively.

Although the pump prices of fuels were unchanged on Sunday, they have been elevated for long and have been touching new highs of late.

Global oil prices are above $55 per barrel currently. Crude prices have remained firm for the last couple of weeks in the wake of unilateral production cuts announced by Saudi Arabia and a pick up in the consumption in all major economies globally.

The last time the retail price of auto fuels were closer to current levels was on October 4, 2018 when crude prices had shot up to $80 a barrel.The current price rise is largely on account of steep increase in central taxes of petrol and diesel and firm crude prices.

Continue Reading

Business

Fuel dearer again: Petrol prices up by 22-25 p/l, diesel by 24-26

Published

on

By

 Petrol and diesel prices rose sharply again on Saturday reaching new all-time highs as oil marketing companies (OMCs) decided to break the pause in revision of auto fuel prices to bridge the widening under recovery.

Accordingly, the pump price of petrol increased between 22-25 paisa per litre across all major metros on the day while diesel prices increased in the range of 24-26 paisa per litre.

With this, petrol is now priced at Rs 85.70/litre in Delhi as against Rs 85.45 a litre previously. Similarly, in Mumbai petrol prices increased to Rs 92.28 a litre, a 24 paisa increase from Friday’s price of Rs 92.04 a litre. In Chennai and Kolkata, petrol is now priced at Rs 88.29 and 87.11 a litre respectively, an increase of 22 and 24 paisa per litre from the previous day’s.

Diesel on the other hand faced sharper increase, rising by 26 paisa a litre in Mumbai from Friday’s level of Rs 82.40 a litre to Saturday’s retail price of Rs 82.66 a litre. In Delhi, diesel rose 25 paisa per litre to Rs 75.88 a litre; in Chennai by 24 paisa per litre to Rs 81.14 a litre and in Kolkata by 25 paisa per litre to Rs 79.48 a litre.

The increase in retail price of auto fuel came on a day when global crude prices showed some signs of softening declining by less than 1 per cent to close to $55 a barrel. Crude price have remained firm for last couple of weeks in the wake of unilateral production cuts announced by Saudi Arabia and a pick up in consumption in all major economies globally.

The increase petrol and diesel prices is fourth such revision this week. The auto fuels had risen sharply by 25 paisa per litre each on Monday and Tuesday before OMCs decided to give relief to consumers from frequent price rise for last two days.

With Saturday’s revision, the pump price of petrol and diesel has now increased by Rs 1.99 and Rs 2.01 per litre, respectively in January so far with OMCs deciding to break an earlier longer period of pause increasing the retail prices first time this year on January 6. The price had been raised on six different days since then.

The last few increases in pump prices in petrol and diesel has taken its price to record levels across the country in all major metro cities and other towns. The last time the retail price of auto fuels were closer to current levels was on October 4, 2018 when crude prices had shot up to $80 a barrel.

The current price rise is largely on account of steep increase in central taxes of petrol and diesel and firm crude prices.

Petrol price was very close to breaching the all-time high level of Rs 84 a litre (reached on October 4, 2018) when it touched Rs 83.71 a litre on December 7, 2020. But the march had been halted ever since then with no price revision by the OMCs in the month. The price rise started again only on January 6.

Oil companies executives said that petrol and diesel prices may increase further in coming days as retail prices may have to be balanced in line with global developments to prevent OMCs from making loss on sale of auto fuels.

Continue Reading

Business

IndiGo to start Agra-Bengaluru flight from March

Published

on

By

indigo airlines
File Photo

As part of its strategy to bolster its regional connectivity, IndiGo has announced Agra as its 64th domestic destination. The airline will connect Agra to Bengaluru and Bhopal through direct flights under the RCS scheme from March 28.

A weekly flight to Goa is also likely to start early February, sources said.The bookings are open with one-way fares starting at Rs 2,523 for Bhopal and Rs 3,789 for Bengaluru.

Sanjay Kumar, Chief Strategy and Revenue Officer, IndiGo said, “We are pleased to have the Golden Triangle cities mapped on the 6E network, with the addition of Agra as our 64th domestic destination.

This will not only enhance connectivity for domestic travellers, but also aid in expanding international air traffic once restrictions are lifted and travel opens up.

Additionally, these connections will help promote tourism, trade and commerce, with Agra being home to multiple UNESCO world heritage sites, one of the hubs for leather goods production and known for its food and delicacies.”

The Agra tourism industry is upbeat as it expects a big inflow of tourists, both domestic and foreign, in the coming days. The industry had long been demanding air connectivity from Agra to major destinations in India. A lone flight to Jaipur was also halted some months ago.

The last 10 months saw a major setback to tourism, with the footfall of foreign tourists falling to just one per cent. The Taj Mahal and other monuments remained closed due to Covid-19 for over six months.

With restrictions now removed, the flow of visitors has increased and the hospitality industry is hoping to make good in the coming months. The daily evening cultural show at the Kalakriti Auditorium – Mohabbat the Taj – has resumed, as weekend crowds have begun thronging Agra again.

The inter-state buses have also begun operations, particularly to Delhi, from Monday, bringing relief to thousands of commuters heading for Palwal, Faridabad, Gurugram and other neighbouring areas.

Welcoming the announcement by IndiGo to start daily flights from Agra to Bangalore, Bhopal and Lucknow, Sunil Gupta, chairman IATO, northern region said “Tourists were hesitant to visit Agra as there are no flights which are usually considered very safe during the pandemic. We are hoping the number of visitors will now increase. We have demanded international flights also from Agra.”

Vice president of the Tourism Guild, Rajiv Saxena said “the flights will be very helpful and boost tourism in Agra. For the tourists, it will be such a big help as travel time would be reduced.”

Before the pandemic, Agra was annually visited by more than seven million tourists. “With three World Heritage monuments, and a number of other tourist attractions, plus Mathura and Vrindavan close by, Agra badly needed air connectivity.

But due to pressure from the Delhi lobby of hoteliers and travel agents, all kinds of hurdles were being created, but now the Modi government has taken a huge initiative which should see a turnaround in the fortunes of the hospitality industry in Agra,” said founder president of the Agra Hotels and Restaurants Association, Surendra Sharma.

Continue Reading
Advertisement

Most Popular