Oil Is Cheap. Why Is Gas, Which Is Made From Oil, Even Cheaper?

Crude oil futures recently fell to about $50 a barrel, the cheapest they have been since May 2005. How does this relate to gasoline prices?

There is a relationship between crude oil prices and gasoline prices, since oil is used to make gasoline. But there is not a simple, linear, one-to-one relationship. In the futures markets, a gallon of gasoline has been, on average over the last six years, 22 cents more expensive than a gallon of crude, according to John C. Felmy, chief economist for API, an oil and gas trade association. (A barrel of oil contains 42 gallons, by the way.) That 22-cent difference comes primarily from the costs of refining oil into gasoline.

Right now, though, the decline in gas prices is outpacing that in oil prices on the futures markets. In fact, a gallon of gas is currently cheaper than a gallon of oil on the futures markets in the New York Mercantile Exchange. Why is this? …