Marathon Oil
Course Number & Name:
Relationship between retail price of gasoline and price of crude oil
In USA gasoline accounts for 50% consumption of petroleum products therefore it is closely monitored by public and research pundits. It is found that, there is asymmetric relationship (asymmetric defined: where one has much more power than the other or putting it differently, when two halves are not equal or same) between retail gasoline prices and crude oil prices -- particularly gasoline prices are more responsive to rising crude oil prices than falling crude oil prices. This is attributable to Market power, search cost, consumer response to changing prices, inventory management, accounting practice and refinery adjustment costs.
Basically, it's a competition that drives gasoline prices sharply upwards because of unspoken agreements between dominant players. When crude oil prices increases, gas stations increase the gasoline price and pass on to consumers immediately. In case of easing crude oil prices, they gradually reducing prices because at first one gas station decreases prices and attracts the public which forces other to reduce the prices to the same level because of competition. Location monopoly also favors gas stations to quickly pass on the prices to consumers and gradually passing the decrease on to consumers. After consumers have searched, the prices of gasoline come down to its competitive level and vice versa.
Refiners also confirm the above findings (asymmetric relationship). They also face huge adjustment cost to alter their output and gradually alter output. In case of low crude oil supplies, refiners reduce output quickly which result in sudden increase in gasoline prices and when crude oil supplies increases they gradually increase output because of delaying the decrease in gasoline prices.
The basic fundamental, Supply and Demand are also important in setting gasoline prices, when the crude prices increase in international market, gas stations adjust the prices of gasoline accordingly through passing price on to the consumer as the oil demand is inelastic. Weak...
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