The gap between crude oil prices and refined gasoline costs, known as the “crack spread,” is once again drawing attention from consumers and analysts alike.
The crack spread measures the margin between what refiners pay for crude oil and what they earn from selling refined products like gasoline to the market.
When crude prices surge quickly, refiners often cannot pass those costs through to consumers immediately, creating a temporary squeeze on their profit margins.
Understanding what drives pump prices requires breaking down the four main cost components built into every gallon of gasoline sold at retail stations across the country.
Slightly more than half of what drivers pay at the pump covers the raw cost of crude oil, with the remainder going toward refining, distribution, marketing, and federal and state taxes.
Economists have long described the phenomenon using the “rocket-and-feathers” hypothesis, which captures how gasoline prices behave differently on the way up versus the way down.
The hypothesis explains why gasoline prices rise so quickly, like a rocket, when oil prices surge, and drift downward oh so slowly, like feathers, when crude prices come back to earth.
Gas stations are not pricing what is already sitting in their underground storage tanks but rather what it will cost to replace that inventory at current wholesale prices.
Retail fuel operates on thin margins, and station owners must account for their next delivery, not their last one, or risk running short on cash to restock.
If wholesale prices surge and retailers keep selling at yesterday’s levels, they risk not having enough cash to refill their tanks, making rapid price adjustments a matter of basic solvency.
Research confirms the asymmetry is significant, with one study finding that gas prices fall twice as slowly as they rise following a major shift in oil prices.
That study found if it took four weeks for gas prices per gallon to increase 25 cents, it would take eight weeks to fall 25 cents once oil prices returned to their starting level.
Most of the upward price movement at the pump lands within one to two weeks of a crude oil price increase, while relief from falling crude prices dribbles in over a much longer stretch.
