Answer to Question #236985 in Economics for Paul Carpenter

Question

Gasoline "prices at the pump" go up and down and Oil "costs per barrel" go up or down, but they do so at different rates and even in opposite directions sometimes. We want to think that demand and supply controls prices where the cost of crude oil is set by the same economic conditions that determine the price of gas. What are these mismatched trends (graphs of each are shown in the following web links) telling us about how demand and supply work in the market?

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EER_EPMRU_PF4_Y35NY_DPG&f=A

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=A

Answer 1

Crude oil prices are not closely related to gasoline prices, as refining adds a lot of value. Thus, the graphs. the ones shown below do not fully reflect the transition from one product to another.