Oil is nearing prewar prices. Why hasn’t gasoline followed suit?

Oil is nearing prewar prices. Why hasn’t gasoline followed suit?

Oil is nearing prewar prices Why hasn - Crude oil prices have dipped to levels close to those observed before the recent conflict with Iran, thanks to a U.S.-Iran memorandum of understanding (MOU) aimed at resolving tensions. Yet, despite this development, the cost of gasoline remains stubbornly high, sparking confusion among consumers and prompting criticism from political figures. While the war’s end may have eased some market pressures, the fuel at gas pumps has not yet reflected the lower oil prices, leaving many questioning why the two metrics diverge.

The Role of Retailers in Price Adjustments

Although the U.S. and Iran’s agreement has helped stabilize oil prices, analysts argue that the blame for elevated gasoline costs should fall on individual gas station owners rather than the major oil companies. This is because the latter control less than 5% of the service stations, but their branded fuels are commonly found at most pumps. As a result, the public’s frustration with the oil industry might be misplaced, according to industry experts.

“Lipow noted that the public’s frustration with major oil firms stems from the slower decline in gasoline prices compared to crude oil, suggesting this sentiment might be misdirected.”

The disparity between oil and gasoline prices became evident during the war with Iran. Crude oil prices surged as the Strait of Hormuz—a critical oil shipping route for about 20% of global consumption—was disrupted. This led to the national average gasoline price exceeding $4.50 per gallon earlier this year. Now, with the oil market stabilizing, the price of West Texas Intermediate crude has retreated to around $69 per barrel, nearly back to its prewar level of $67. However, gasoline prices have not mirrored this trend, averaging $3.90 per gallon as of Friday, according to AAA.

Supply Chain Dynamics and Inventory Levels

The gap between crude oil and retail gasoline prices can be attributed to several factors, including the current state of the supply chain and inventory levels. Claudio Galimberti, chief economist at Rystad Energy, highlighted that low corporate gasoline inventories are a significant contributor. He explained that the driving season has increased demand, while global supply chains have been strained by prolonged disruptions. As a result, inventory levels worldwide have been declining, which limits the ability of retailers to quickly adjust prices downward.

“We are in the middle of the driving season, and therefore demand is very high,” he said, adding that since the world is coming out of a prolonged disruption ‘inventories have been going down everywhere in the world.’

Furthermore, the process of translating lower oil prices into lower fuel costs at the pump takes time. Rob Smith, director of global fuel retail at S&P Global Energy’s Refining and Marketing group, emphasized that while retail prices rise rapidly during crises, they tend to fall more slowly afterward. He pointed out that the recent war caused a sharp increase in crude prices, but the retail sector has been slower to respond, requiring a period of normalization to see the effects.

Political Reactions and Industry Pushback

President Trump has been vocal about the oil industry’s pricing strategies, accusing it of “gouging” consumers. In a post on Truth Social, he argued that major oil companies are not lowering prices at the pump in line with reduced crude costs. He called for the Department of Justice to investigate the matter, insisting that gasoline prices should drop more quickly.

“The big Oil Companies are not dropping their price at the pump commensurate with the sharply lower prices they are paying for Oil,” Trump wrote. “In other words, customers are being ‘gouged.’”

The American Petroleum Institute (API) has countered these claims, asserting that gasoline prices do not always align with crude oil prices, especially during major global disruptions. API spokesperson Bethany Williams stated that the market’s complexity—encompassing supply, refining, and inventory challenges—means retail prices often lag behind changes in crude costs. This explanation underscores the multifaceted nature of the fuel market and the challenges faced by both producers and retailers.

The Fragmented Retail Market

Another key reason for the slow adjustment in gasoline prices is the fragmented ownership structure of the U.S. retail market. According to the National Association of Convenience Stores, the majority of gas stations are small, independent businesses, with approximately 55% operated by single-location owners. Major oil companies own fewer than 5% of the stations, which means the market is highly decentralized.

“The U.S. retail gasoline market is so incredibly fragmented in terms of ownership that it’s very difficult for there to be any kind of coordinated effort,” said the API representative. “Given that fragmented nature, and how competitive it is—price signs are everywhere… there’s intense pressure on pricing and margins. It’s very difficult to do any kind of coordinated gouging.”

This fragmentation complicates efforts to lower prices uniformly. While major oil firms may have the resources to influence crude prices, individual retailers often prioritize immediate profits over long-term adjustments. This dynamic has allowed gasoline prices to remain elevated even as the underlying oil market stabilizes. Chevron’s CFO, Eimear Bonner, echoed this sentiment, stating that price reductions will take time as the market continues to normalize. She noted that there is a lag between lower oil prices and their reflection at the pump, a process that requires careful recalibration of supply and demand.

Global Context and Strategic Moves

The situation in the Strait of Hormuz remains a focal point of the ongoing conflict. While the MOU aims to ensure the free flow of ships through this vital waterway, tensions have flared again. Iran recently fired on a vessel it claimed was not following proper routes, reinforcing its control over the strait. In response, the Trump administration launched a military strike, demonstrating the strategic importance of the region to global energy markets.

“Retail operators were squeezed in terms of their margin in April, so there is a need to recoup that margin—to average it out,” said Rob Smith.

Despite these strategic actions, the impact on gasoline prices has been delayed. The war created a surge in oil prices, but the retail sector has not yet fully absorbed the lower crude costs. Analysts suggest that the combination of supply chain constraints, inventory levels, and competitive pricing pressures has contributed to this delay. As the market continues to adjust, consumers may see gradual improvements, but for now, the high prices persist, highlighting the intricate relationship between global oil markets and local fuel prices.

In summary, while the end of the Iran conflict has eased oil price pressures, gasoline prices remain high due to a mix of factors. Retailers, operating in a competitive and fragmented market, face challenges in quickly lowering prices, and inventory levels, combined with the lag in supply adjustments, further slow the process. As the industry navigates these complexities, the path to lower fuel costs is likely to be gradual rather than immediate.