Condor Capital Management's Ken Schapiro on Crude Oil & Gasoline Prices: Like Most Relationships, This One Isn't Perfect
22 December 2014 - 10:00PM
A commonly observed phenomenon that takes place within the retail
gasoline market is the asymmetrical way in which gasoline prices
adjust to changes in crude oil prices. While there is a general
belief that gasoline prices should adjust proportionately and
symmetrically to crude oil's price movements, this is actually a
misconception. In fact, the way that gasoline prices adjust is
commonly referred to as a "rockets and feathers" reaction, whereby
gasoline prices adjust rapidly to increases in crude prices, while
adjusting slowly to decreases. Given the recent attention global
energy markets have garnered, and to better understand why this
relationship between gasoline and crude exists, we asked Condor
Capital Management's President and Founder, Ken Schapiro, to shed
some light on the various factors influencing the not-so-perfect
relationship gasoline prices and crude oil have.
To begin with, during the production process and before crude
makes its way to end users, both the raw materials (crude itself)
and finished goods (gasoline) change hands multiple times. For each
time that inputs change hands, additional costs related to anything
from refining, shipping, and storing are incurred, and inflate the
final price. Schapiro noted that these supplementary costs are
referred to as "pass-through" and make up roughly 30% of gasoline's
retail price. Furthermore, all of these various steps within
the production process have their own individual pricing structures
that will fluctuate over time. As a result, pass-through may
skew gasoline prices and prevent them from moving in lock step with
the price of crude.
Schapiro also stated how important it is to keep in mind the
slim profit margins that gasoline retailers achieve when selling
fuel at the retail level. If the price of crude oil increases,
the cost to purchase it increases for retailers and they must
quickly raise prices on gasoline or face losing money. Because
of this, is it any surprise that gasoline prices swiftly adjust to
crude price increases? Alternatively, when crude prices go down, it
is not as important for retailers to quickly adjust their pricing
proportionately. In fact, lower oil prices may give them an
opportunity to bolster cash flow in preparation for eventual crude
price increases.
Finally, consider the psychological impact that even slight
price decreases in gasoline have on consumers' mentality. If
drivers recognize that prices have dropped, even by a few cents,
they become content with the bargain they have found relative to
their last fill up. This gives consumers less incentive to
drive around looking for lower prices and may even entice them to
fill up their entire tank versus a partial fill up. Happier
customers, coupled with no real short term risk of losing market
share, create a situation where gas stations have practically no
pressure on them to lower prices as sharply in response to falling
crude prices.
The bottom line is that while gasoline prices do move in the
same direction as crude oil prices, the magnitude and speed of the
move is not a perfect response. With that said, even as
motorists could have seen bigger relief at the pump, Schapiro
points out that drivers still have a lot to be thankful for this
holiday season as lower fuel prices essentially amount to a tax cut
for the masses.
Condor Capital Management
Founded in 1988, Condor Capital Management is an employee-owned,
SEC-registered investment advisor based in Martinsville, N.J.
employing 15 professional and support staff. Since Condor is a
fee-only investment management firm, its fees are based on
portfolio size, not sales commissions or number of trades. For more
information on Condor Capital Management, please visit
www.condorcapital.com or call 732-356-7323.
CONTACT: Ken Schapiro, info@condorcapital.com