The national average price of gasoline fell to $3.99 per gallon this week, the first time it’s been below $4 since March 30, a month after the war on Iran began.
The war virtually closed the Strait of Hormuz, an essential shipping route through which about 20% of the world’s oil supply passes. The United States and Iran signed a memorandum of understanding on June 17 that sets up negotiations over the most contentious issues dividing the two sides.
President Donald Trump announced the pact on June 14. It was signed on June 17. Besides ending the war, it would allow oil shipments to resume through the strait, a move that could bring down the price of gasoline — eventually.
After the war is over, “you’re going to see gasoline and oil drop like a rock,” Trump said on May 11. But while oil prices began to decline on June 15, it could take weeks or months for you to see gas prices at pre-war levels at your local pump.
Ships Begin to Move Through Strait of Hormuz
Three Saudi-flagged supertankers with 6 million barrels of crude onboard and other ships sailed through the Strait of Hormuz hours after Trump signed a deal with Iran to end their war, Reuters reported June 18.
Other reports said a mix of crude tankers, LNG carriers and other commercial vessels were crossing the strait.
The price delay is explained by a phenomenon known as the “rockets and feathers” effect. Gas prices rise like a rocket when crude oil prices go up. They fall like a feather when oil prices decline.
That’s a reflection of links in the gasoline supply chain, including transportation, inventories, refining, and retail pricing. Here is what’s happened with prices so far.
Gasoline Prices Have Declined
“Average gasoline prices fell in 47 states over the last week, with the national average dropping below $4 per gallon late Sunday for the first time since mid-April,” according to Patrick De Haan, head of petroleum analysis at GasBuddy, in a report this week.
With the strait open, “oil will flow on both ends again for the Region, and the World!” Trump wrote on Truth Social on June 14.
Oil Prices Are Also Down
But while oil prices declined in reaction to news of the deal, “it remains to be seen whether the agreement will hold,” De Haan said.
De Haan expects the national average price of gasoline should head toward $3.70 per gallon, and “if everything goes well” he predicts it could fall below $3 per gallon later this year.
Why Fuel Prices Are Quick to Rise, Slow to Fall
Gas stations set their prices based partly on what they will have to pay for new fuel, not just what they’ve paid for the fuel already in the tank, according to research by the Federal Reserve Bank of Dallas.
Gasoline prices usually rise with price changes in crude oil, but other factors are involved. Your local gas station may raise pump prices immediately, anticipating it will pay more for the next delivery of gas.
But when oil prices fall, stations are slower to reduce pump prices. That may be traced to local competition, inventory delivery timing, and relief from the latest price squeeze.
You may also play a part. Consumers may not comparison shop for cheaper gas when pump prices start to fall, according to the Federal Reserve Bank of St. Louis. If buyers are spending more, there’s less incentive for stations to cut prices.
Source: USA TODAY Network reporting and research; Reuters; AAA; Energy Information Administration; GasBuddy.com; Federal Reserve
Add a Comment