President Donald Trump's "crack spread" problem isn't going to get better any time soon, according to a new analysis.
When Trump touts a possible peace deal with Iran and crude oil prices drop, drivers might assume gas prices will follow. But they usually don't, and the reason lies in a lesser-known metric called the crack spread, wrote energy and global oil expert Skip York in a New York Times op-ed.
"Focusing on the price of crude is misleading, a bit like following the price of wheat when it's bread that you're actually buying," wrote York, a fellow at the Center for Energy Studies at Rice University’s Baker Institute. "The gauge to watch is what's called the crack spread — the difference between the cost of a barrel of crude and the prices of the refined products made from it."
The term "cracking" refers to the refining process of breaking large hydrocarbon molecules into smaller, usable fuel molecules, York explained, and that crack expands when crude oil prices fall faster than gas and diesel prices.
The spread matters because crude prices and pump prices don't move in lockstep, he wrote. By the end of July, crude oil had fallen about 25 percent from its April peak, but gasoline had dropped only about 9 percent. That gap is the crack spread widening, and it reflects what's known as the "rocket and feather" effect, when retail gas prices shoot up quickly when wholesale costs rise.
"When wholesale prices of gasoline spike, service station owners raise prices quickly because they know their future gas deliveries will be more expensive," York wrote "They might also notice that competitors are raising prices and act accordingly, as nobody wants to sell today's fuel at yesterday's price and forego the profits."
"Conversely, when station owners see wholesale costs start to fall," he added, "they're not necessarily in a rush to cut prices and sacrifice profit margins — at least until customers start to notice."
Right now, the crack spread is being driven wider by a global refining squeeze rather than a crude oil shortage, York wrote. Ukrainian drone strikes have knocked out significant Russian refining capacity, and the Iran-U.S. conflict has damaged refineries in the Persian Gulf, even as crude production in both regions recovers.
Roughly 9 percent of global refining capacity is currently offline, he added. China, the world's largest crude importer and refiner, has also cut crude imports to an eight-year low while simultaneously restricting fuel exports, tightening global supply of finished products even further.
Crude oil isn't in short supply, but the capacity to turn it into usable fuel is, York explained. That's why wholesale gasoline and diesel prices have risen roughly 59 percent and 69 percent over the past year, far outpacing crude's 36 percent increase, a structural problem more likely to keep pump prices elevated than any single crude price swing.