Why do gasoline prices drop more slowly than oil prices?

One day after oil prices fell through the floor, there was not an immediate drop in prices at many gas stations in the San Diego area.

Fuel experts say it usually takes about six weeks for fluctuations in oil prices to work their way through the distribution system to the neighborhood gas pump.

But Patrick DeHaan, head of petroleum analysis at GasBuddy.com, said there’s another factor at work: Local gas station owners are trying to hold on amid a perfect storm of too much supply and a crash in demand that has upended all conventional thinking in the fuel sector.

“All of this is unexpected, unprecedented, uncharacteristic — I think that’s all the ‘un’ words I can use right now,” DeHaan said.

The May futures contracts for domestic oil — West Texas Intermediate — dropped to minus-$37.63 per barrel on Monday, the first time in U.S. history that oil fell into negative territory. A financially deadly combination of a global oversupply of crude and COVID-19 stay-at-home restrictions that have kept millions of Americans off the roads created a mismatch between buyers and sellers because there is too much oil and not enough places to store it.

The bleeding slowed Tuesday but did not stop. May futures contracts climbed back above zero to finish the day at $10.01 a barrel but the more widely held June WTI contracts dropped by more than 40 percent to $11.57 as the traders remained rattled.

“U.S. oil storage is busting at the seams,” said Dec Mullarkey, managing director of investment strategy of Toronto-based SLC Management.

Since gasoline is a product of oil, the price of the latter affects the price of the former. And while the price of gasoline in San Diego and across the country has declined in past six weeks — the average price for a gallon of regular in San Diego is down 20.6 percent since March 5 — it has not fallen as precipitously as oil, which was trading above $60 a barrel when the year started.

In fact, according to GasBuddy, the average price in San Diego went up a penny by late Tuesday afternoon, one day after the historic fall in oil prices.

What gives?

DeHaan said he expects gas stations to continue to lower their prices but with demand slashed, many owners are “passing on the decreases very, very slowly —slower than I’ve ever seen” because of the uncertainty over when the economy will return to some semblance of normalcy.

Due to the COVID-19 “shelter-in-place” guidelines and the global oil glut, demand for gasoline has plummeted, stifling the gasoline sales and cash flow of gas station owners.

“We know restaurants and bars are suffering but so too are gasoline stations because 50 percent to 70 percent of their business just completely vaporized,” DeHaan said.

“So I think gas stations are going at snail’s pace because they don’t know when their volumes will return to normal,” DeHaan said. “And a penny earned today is a penny that they may have in the future that helps them stay afloat. Gas stations have never seen such a drop in demand and they’re basically in survival mode.”

There’s long been a debate over whether customers get gouged during price swings and finding answers often gets complicated.

First, the accusations are difficult to prove and second, local station owners operate on very thin margins even under normal conditions. Many owners make more of their money from selling items inside their stores than at the pump.

Big oil companies have largely exited the business of owning the gas stations that carry their signage because it was hard to make money on them. Twelve years ago, ExxonMobil announced it was selling its 2,200 company-owned gas stations. The vast majority of gas stations are now independently operated.

Last fall, Gov. Gavin Newsom called on the California attorney general to look into what UC Berkeley professor Severin Borenstein has called the “mystery surcharge” at some gas stations. Borenstein says since 2015, there’s a differential of between 20 to 50 cents a gallon that California motorists have paid that cannot be accounted for after taxes and fees are taken out.

No word yet on whether the attorney general’s office will launch an investigation.

In the meantime, DeHaan says motorists should shop around because there’s such a wide range of prices from one station to another in the county.

While the average price for regular in the San Diego area was $2.80 a gallon Tuesday, a healthy number of stations were selling gas at $2.18 while others posted prices at $3 a gallon and higher. GasBuddy even reported four stations in the county selling regular below $2 a gallon, including one in Escondido.

“If you’re not an educated consumer,” DeHaan said, “you’re going to spend a dollar a gallon or more than you have to.”

Now if motorists can just find a reason to drive somewhere.