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Can someone explain why during the start of Covid lockdowns, gasoline prices didn’t drop to $1.00/gallon? There was no demand, and plenty of supply. The simple

by jmpman 5y ago

Can someone explain why during the start of Covid lockdowns, gasoline prices didn’t drop to $1.00/gallon? There was no demand, and plenty of supply. The simple supply/demand curve of my high school economics memory, seems to imply prices should have taken a dive to virtually zero. Sure they went down, but nowhere near what the models I’d learned would predict. Just a rant that lit up inside my brain every time I filled up during that time when the streets were as empty as any zombie movie.

LeoPanthera 5y ago
(This is a guess, but) I suspect there is a base rate of inelastic demand which either never changes or changes very slowly. This keeps the price from falling significantly.
Dork1234 5y ago
Transportation and Taxes alone would prevent it getting that low. https://gaspricesexplained.com/#/?section=whatconsumers-are-paying-for-at-the-pump https://gaspricesexplained.com/#/?section=whatconsumers-are-... Refiners can also switch to diesel and/or heating oil which appears to be in just as high as demand as before Covid.
- tenpies 5y ago
  I would add that taxes are now a higher proportion of fuel costs - and will probably continue to become so as more carbon and emissions taxes are passed. Of course, this is assuming oil prices don't go parabolic, which they may given our self-destructive energy policies. Wikimedia has an awesome chart with 2022 data for each US state's tax burden on gas prices for example: https://upload.wikimedia.org/wikipedia/commons/e/e9/Gasoline_Diesel_Taxes.webp https://upload.wikimedia.org/wikipedia/commons/e/e9/Gasoline...
friedturkey 5y ago
I think we've reached a point where prices don't really drop on anything within established industries even when it's expected that they should, unless they're at serious risk of being replaced by a newer, better product. My country had a massive glut of milk overproduction this year. Well beyond what the country could drink, use in other products, or even export. Know what happened? Some companies reduced milk container sizes from 1000mL to 900mL and prices went up.
TameAntelope 5y ago
Oil barrel (futures) prices dropped into the negatives in 2020, which meant people were literally paying to give their barrels of oil away [0], driven partially by storage concerns. So I guess, in a sense, what you're asking about did happen? [0] https://www.marketwatch.com/story/oil-prices-went-negative-a-year-ago-heres-what-traders-have-learned-since-11618863839 https://www.marketwatch.com/story/oil-prices-went-negative-a...
ctime 5y ago
Actually many places with real competition, near production and very little regulation in the U.S. did have $1.00 or so gallon gas, i.e. much of the south and near energy producing areas in LA for example. I wouldn't be surprised to find out that gas retailers in California would continue to price their gas at ~$5.00 a gallon when they don't actually have any to sell (or conversely, aren't selling any at all) because of how inelastic and regulated the supply is. Everyone in CA that I know is ready to be done with gas. Regrettably, Californians also pay some of the highest costs for electricity (more expensive than HI[1]) so we're out of the frying pan and into the fire. Nothing more American than regulatory capture (looking at you SDG&E and CPCU) [1] https://www.cbs8.com/article/money/amped/san-diego-has-the-highest-electricity-rates-in-the-country/509-b33c2aa1-5414-431d-a060-273059f1e0da https://www.cbs8.com/article/money/amped/san-diego-has-the-h... edit: source for $1 gallon https://abc7news.com/gas-prices-lowest-in-a-decade-13-states-where-is-under-1-drop-amid-coronavirus-pandemic/6116861/ https://abc7news.com/gas-prices-lowest-in-a-decade-13-states...
- wolverine876 5y ago
  Which regulations are raising prices? Also, I'm a little confused: SD and LA are in California, of course.
  - mulmen 5y ago
    “San Diego is even out-passing Hawaii, which is not even on the mainland.”
  - gotoeleven 5y ago
    Gas tax is 51.1 cents/gal They require a special formula for which there aren't many refineries https://ww2.arb.ca.gov/resources/fact-sheets/gasoline-frequently-asked-questions https://ww2.arb.ca.gov/resources/fact-sheets/gasoline-freque...
    - wolverine876 5y ago
      Thanks, but tax isn't a regulation and doesn't have the impacts described in the GP.
ineedasername 5y ago
OPEC oil production dropped off a cliff after things shutdown in 2020, so the supply did not remain high. At the same time, at least a little demand shifted rather than disappeared by increasing home deliveries of goods and services. In the US, gasoline prices still dropped about 30% off their most recent pre-covid prices. There are also fixed costs involved with transporting gasoline, running a gas station, gas tax, etc that will not change much with supply & demand. Given all of this, gas prices seem to mostly correspond to what was happening: production plummeted, demand plummeted with some modest shifts, and so prices at the pump dropped by a relatively modest 30%.
jen20 5y ago
In Houston, I remember seeing fuel prices at the start of the pandemic at the pump for close to $1.00/gallon (in the ~$1.10-$1.30 range depending on the forecourt).
buscoquadnary 5y ago
I am surprised no one has mentioned it because it's actually very important internationally speaking. Basically what happened was oil demand dropped substantially in China which is one of the biggest and growing consumers of oil. OPEC had an agreement to reduce oil sales and raise prices in response to the sudden decrease in demand. Russia refused to restrict their supply in defiance of OPEC so the Saudis flooded the market with a bunch of super super cheap oil to undercut Russia. That's what led to the negative prices another commenter mentioned. The problem was is that most of the US oil production is shale oil production. Shale oil is more expensive to produce than raw crude, which is why it didn't really take off in the US until gas was moving towards the $4.00 mark in the mid oughts. The problem that caused now is that the cheap oil all over the market, combined with the decrease in demand priced out shale oil producers who shuttered and now that demand is returning the companies helping supply don't exist anymore. As for why it didn't drop lower I was seeing low $2.00 and under in places.
landemva 5y ago
Pump price went slightly below $1/gallon where I was. Maybe you are in high tax State?

by jmpman 5y ago

LeoPanthera 5y ago

(This is a guess, but) I suspect there is a base rate of inelastic demand which either never changes or changes very slowly. This keeps the price from falling significantly.

Dork1234 5y ago

Transportation and Taxes alone would prevent it getting that low. https://gaspricesexplained.com/#/?section=whatconsumers-are-paying-for-at-the-pump https://gaspricesexplained.com/#/?section=whatconsumers-are-... Refiners can also switch to diesel and/or heating oil which appears to be in just as high as demand as before Covid.

tenpies 5y ago
I would add that taxes are now a higher proportion of fuel costs - and will probably continue to become so as more carbon and emissions taxes are passed. Of course, this is assuming oil prices don't go parabolic, which they may given our self-destructive energy policies. Wikimedia has an awesome chart with 2022 data for each US state's tax burden on gas prices for example: https://upload.wikimedia.org/wikipedia/commons/e/e9/Gasoline_Diesel_Taxes.webp https://upload.wikimedia.org/wikipedia/commons/e/e9/Gasoline...

friedturkey 5y ago

I think we've reached a point where prices don't really drop on anything within established industries even when it's expected that they should, unless they're at serious risk of being replaced by a newer, better product. My country had a massive glut of milk overproduction this year. Well beyond what the country could drink, use in other products, or even export. Know what happened? Some companies reduced milk container sizes from 1000mL to 900mL and prices went up.

TameAntelope 5y ago

Oil barrel (futures) prices dropped into the negatives in 2020, which meant people were literally paying to give their barrels of oil away [0], driven partially by storage concerns. So I guess, in a sense, what you're asking about did happen? [0] https://www.marketwatch.com/story/oil-prices-went-negative-a-year-ago-heres-what-traders-have-learned-since-11618863839 https://www.marketwatch.com/story/oil-prices-went-negative-a...

ctime 5y ago

Actually many places with real competition, near production and very little regulation in the U.S. did have $1.00 or so gallon gas, i.e. much of the south and near energy producing areas in LA for example. I wouldn't be surprised to find out that gas retailers in California would continue to price their gas at ~$5.00 a gallon when they don't actually have any to sell (or conversely, aren't selling any at all) because of how inelastic and regulated the supply is. Everyone in CA that I know is ready to be done with gas. Regrettably, Californians also pay some of the highest costs for electricity (more expensive than HI[1]) so we're out of the frying pan and into the fire. Nothing more American than regulatory capture (looking at you SDG&E and CPCU) [1] https://www.cbs8.com/article/money/amped/san-diego-has-the-highest-electricity-rates-in-the-country/509-b33c2aa1-5414-431d-a060-273059f1e0da https://www.cbs8.com/article/money/amped/san-diego-has-the-h... edit: source for $1 gallon https://abc7news.com/gas-prices-lowest-in-a-decade-13-states-where-is-under-1-drop-amid-coronavirus-pandemic/6116861/ https://abc7news.com/gas-prices-lowest-in-a-decade-13-states...

wolverine876 5y ago
Which regulations are raising prices? Also, I'm a little confused: SD and LA are in California, of course.
- mulmen 5y ago
  “San Diego is even out-passing Hawaii, which is not even on the mainland.”
- gotoeleven 5y ago
  Gas tax is 51.1 cents/gal They require a special formula for which there aren't many refineries https://ww2.arb.ca.gov/resources/fact-sheets/gasoline-frequently-asked-questions https://ww2.arb.ca.gov/resources/fact-sheets/gasoline-freque...
  - wolverine876 5y ago
    Thanks, but tax isn't a regulation and doesn't have the impacts described in the GP.

ineedasername 5y ago

OPEC oil production dropped off a cliff after things shutdown in 2020, so the supply did not remain high. At the same time, at least a little demand shifted rather than disappeared by increasing home deliveries of goods and services. In the US, gasoline prices still dropped about 30% off their most recent pre-covid prices. There are also fixed costs involved with transporting gasoline, running a gas station, gas tax, etc that will not change much with supply & demand. Given all of this, gas prices seem to mostly correspond to what was happening: production plummeted, demand plummeted with some modest shifts, and so prices at the pump dropped by a relatively modest 30%.

jen20 5y ago

In Houston, I remember seeing fuel prices at the start of the pandemic at the pump for close to $1.00/gallon (in the ~$1.10-$1.30 range depending on the forecourt).

buscoquadnary 5y ago

I am surprised no one has mentioned it because it's actually very important internationally speaking. Basically what happened was oil demand dropped substantially in China which is one of the biggest and growing consumers of oil. OPEC had an agreement to reduce oil sales and raise prices in response to the sudden decrease in demand. Russia refused to restrict their supply in defiance of OPEC so the Saudis flooded the market with a bunch of super super cheap oil to undercut Russia. That's what led to the negative prices another commenter mentioned. The problem was is that most of the US oil production is shale oil production. Shale oil is more expensive to produce than raw crude, which is why it didn't really take off in the US until gas was moving towards the $4.00 mark in the mid oughts. The problem that caused now is that the cheap oil all over the market, combined with the decrease in demand priced out shale oil producers who shuttered and now that demand is returning the companies helping supply don't exist anymore. As for why it didn't drop lower I was seeing low $2.00 and under in places.

landemva 5y ago

Pump price went slightly below $1/gallon where I was. Maybe you are in high tax State?