Crude Oil vs. Gas at the Pump

By Edward Ericson Jr.

Jun 04, 2014 11:14 PM

Here's something I've been pondering: Crude oil prices are almost comically low, yet gas prices have not been falling. Sure, they're like half what they were last summer. But it wasn't long ago that $2 gas was not good news. And anyway, back a few months ago, when regular unleaded was $1.48, wasn't crude, like, high or something?

Yep.

My question: How much are the big oil companies making--and how does that margin compare to what they made years past? In the business, this is called the crack spread, and it's higher and more volatile now than it used to be. Here's how to figure:

Current price =$36/barrel (42 gals per barrel) means raw oil is at $.86 per gallon.

Gasoline here in Baltimore is about $1.86 for unleaded regular. So the spread is $1.

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How does that compare to historical norms?

Turns out it's right in line with 2006.

Here's a good study

[pdf] of the spread both nationally and in California.

The spread fell to as low as 85 cents in late 2006.

But in Oct. 2008, the spread was

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negative

as crude prices plunged in the wake of a massive demand retrenchment.

Interestingly, the crack spread has

gotten volatile

since the year. . .hmmm . . . 2000. (Hat tip:

Seeking Alpha

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Notice: the chart says the spread hovered around 50 cents, seldom spiking above $1 from 1990 through 2000. Then all of a sudden it got real mountainous, cranking past $1.50 a few times, and even up to $3.50. (I'm not even sure how this is possible, but Seeking Alpha is not to be doubted on charts and stuff.)

Thought of in another way: If this were, say, 1999, $36 crude would likely yield $1.40 regular unleaded instead of $1.90. But it could be worse. . . .

Here's a broader chart

tracking gas vs. crude prices back to 1946.

Notice, the volatility starts in 1973 with the first Arab oil embargo. We can see how the oil game changed from a nice, steady monopolistic rake to something marked by big peaks and valleys. The recent volatility in the crack spread is just an extension of that trend, owing in large part to the lack of new refineries built since the 1970s.