A common complaint from any driver is that when Oil prices go up, gas prices do so overnight, but when oil prices drop gas prices are slow to follow. A quick bit of research always showed this not to be the case, there was a close correlation between the two.
However since August 2011 this close relationship has come unhinged. Click on the chart to get a closer look. Notice how after August 2011 even though Oil Prices took a dive gas prices didn’t, in fact there was a small uptick before they came down. To be fair to the Oil companies notice that after October 2011 Oil prices shot up but gas prices didn’t and continued to fall until this year.
I wonder if this is evidence of the Oil companies wanting to reduce the volatility of gas prices. Sharp increases or decreases brings attention to the price of gas; certainly since 2007 the swings have been wild. It isn’t uncommon to see prices change by 10c overnight. My guess is that Oil companies are trying to smooth out the price of gas, maybe to just get out of the limelight with constant attention by congress.
Managing gas prices to decrease volatility may sound good in theory, but if they can continue to do this, then the temptation to do as we always have feared they have done (quick to raise slow to fall) will be irresistible whenever profits soften.
Another possibility is that the government is responsible for decoupling the price of oil and gas prices. How? By selling or buying oil for the strategic oil reserve. The government have been pushing for this recently. Electric prices are much more stable than gasoline prices, Joseph Romm indicates in his article that the move the electric fuel needs to happen at the same time using the strategic oil reserves to smooth out price fluctuations. That explains smoothing out oil prices, but not gas prices in isolation.
What do you think is behind this apparent management of gas prices?
An alternative hypothesis is that the disconnect between oil prices and gas prices coincides with my purchase of the Nissan LEAF in August 2011. Well maybe not, just saying.