The price of crude oil—and more importantly, gasoline—has climbed to painful levels once again. As of early April, the quote for Brent crude, the international yardstick, was about $126 per barrel—only some $16 below the $142 peak seen in the summer of 2008. But domestic West Texas Intermediate crude is only getting $107 per barrel—a full $38 below the 2008 peak. Meanwhile, we are told that U.S. oil production is up, gasoline demand is down, and we are even exporting gasoline to foreign countries. So why is the price of gasoline, at an average of $3.84 per gallon for regular, according to the U.S. Energy Information Administration, within five percent of the 2008 peak when domestic crude is fully 26 percent lower?

It’s easy to imagine oil-company conspiracies when seeing these figures. But, as usual, the truth is a bit more complicated—and less satisfying. As the chart below shows, the price of gasoline does move in concert with crude-oil prices, although the proportionality between the two does vary with market conditions. According to John C. Felmy, the chief economist for the American Petroleum Institute, since 1968, the retail price of gasoline has averaged about $1.17 above the price of a gallon of crude oil (in 2012 dollars). That figure includes the average state and federal taxes of about 49 cents (varying from 26 cents in Alaska to 67 cents in California, Connecticut, and New York), the cost of refining the crude into gasoline, the transportation and distribution costs, and the refiner’s profit.

By that standard, a refiner that starts with Brent crude pays $126 for a 42-gallon barrel of oil, or $3.00 per gallon, would be charging about $4.17 a gallon for gasoline. Refiners using WTI crude would charge $3.72. In America, most refiners are stuck paying the Brent price, because the WTI crude tends to pile up in Cushing, Oklahoma, and is only conveniently available for refineries in the Midwest. But if you blend these prices in a ratio of three parts Brent to one part WTI, you get an average projected retail price of $4.06 per gallon. Since gas is selling for about 20 cents less than that, the current price does not suggest price gouging.

As an aside, during the huge run-up in the summer of 2008, the gap between the price of crude and the $4.05-per-gallon retail price was only 60 to 70 cents, suggesting that despite the record gas prices, there was no profit being made in the refining business. That said, companies in the crude-oil drilling and delivery end of the business made a killing.

Continued…