Price of oil plunging, but cost of gas won’t

updated 4:48 p.m. ET Jan. 21, 2007

NEW YORK - The headlines say oil prices have fallen 15 percent this year. Gas station receipts tell a different story — the cost of filling ’er up has slipped from about $35 to $33. Big deal.

The cost will probably drop further, but drivers shouldn’t hope for a big windfall at the pump: there’s a lot more that goes into gasoline prices than the current cost of crude oil.

Besides taxes and the costs of refining, distributing and marketing, there are factors such as local competition among gas stations. Just as with other forms of retail, consumers see savings when one retailer lowers its price, and the others scramble to match it.

“If gasoline costs me a dollar a gallon, and my competition down the street is selling it for 89 cents, my customer doesn’t care what I paid for it,” said Richard Oneslager, president of Balmar Petroleum, which operates 14 gas stations in Colorado.

Crude oil prices have fallen from about $61 to $51 a barrel this year on the New York Mercantile Exchange, but the price of gasoline on the side of the road has declined more slowly. The average price for a gallon of regular is down about 13 cents from $2.33 on Jan. 1 to $2.20 on Friday, a day after crude briefly fell below $50.

A typical car holds 12 to 15 gallons, so if it’s filled four times in a month, that’s savings of less than $8 in a month — not even enough for that daily cup of coffee.

Pump prices haven’t plunged to $2 a gallon yet, which is where they were back in early 2005, when crude oil prices were also around $50 a barrel. The big difference was that, unlike now, crude oil wasn’t coming off a record high of $78 a barrel just six months earlier.

Essentially, the recent price drop hasn’t completely sunk in on the wholesale level, so gasoline retailers are still paying a lot for their product and won’t lower prices until competition forces them to do so.

The Energy Department says the price of crude oil accounts for about half the retail price of gasoline. That means if crude oil is down 15 percent, pump prices should be down almost 8 percent.

But the time it takes for a drop in wholesale prices to fully affect retail prices is around 12 weeks, though most of the drop happens within the first two weeks.

“Retailers aren’t making their price decisions on the price of crude oil,” said John Eichberger, vice president of government relations at the National Association of Convenience Stores. Instead, they focus on how much they paid for their current load of gasoline, and how much their supplier is telling them their next load will cost.

“We don’t care about anything except what that tank the truck just brought in cost,” Oneslager said.

Contrary to what many drivers think, the huge “ExxonMobil” or “Chevron” signs above your local gas stations don’t necessarily mean they’re run by big oil companies — a lot of them are franchised. Jeff Sundstrom of AAA estimates that over 80 percent of the nation’s gas stations are run by individuals or small to medium-sized businesses.

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