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What does it mean when oil prices go negative? No, it doesn't mean the gas station will pay you to fill up

Posted April 20, 2020 6:48 p.m. EDT
Updated April 21, 2020 2:07 a.m. EDT

What does it mean when oil prices go negative? No, it doesn't mean the gas station will pay you to fill up

— Even though a historic decline for oil sent prices negative on Monday, don't expect to get paid to fill up your gas tank any time soon.

Or ever, truth be told.

There were some unique conditions driving oil prices below $0 for the first time ever. And more importantly, crude oil prices only have an indirect impact on the retail price for a gallon of gasoline.

The huge drop in US gasoline consumption in recent weeks due to stay-at-home orders during the COVID-19 outbreak has pushed down both oil and gasoline prices, since there is excess supply of both. And the space needed to store that excess supply is running short, which is part of what led to the negative oil price on Monday.

The average price of a gallon of gas heading into Monday stood at $1.81, according to AAA, down 5 cents a gallon from a week and off 36 cents a gallon from where prices stood a month ago as the stay-at-home orders were just starting.

So gas is cheap - more than a dollar cheaper than it was a year ago at this time - but it's hardly less than $0.

Monday's negative price for crude was the result of some unusual dynamics in the oil market. The record low close in the May contract for West Texas Intermediate came on very thin trading volume ahead of Tuesday's expiration. That's because there are concerns that there will be no room to store those barrels delivered in May. The June contract, however, only dropped around 10% to $22 a barrel. And Brent crude, the world benchmark, fell just 5% to $26.50 a barrel.

Still, oil contracts roll over each month and they don't normally crash to record lows.

"With the expiration of the futures, and program trading and the like, prices can run amok," said Tom Kloza, chief oil analyst for the Oil Price Information Service. "Today that ecosystem ran amok."

Crude is not the best predictor of retail gasoline price. Instead, wholesale gasoline prices that determine what gas stations will pay for gasoline. And gasoline futures did not have the same wild swing Monday, closing down only a few cents at about 67 cents a gallon. That's actually close to twice the price they were trading at just last week.

"Wholesale gasoline futures and oil futures are definitely linked, but they don't necessarily reflect each other on any given day," said Jeff Lenard, spokesman for the National Association of Convenience Stores.

And even wholesale gasoline futures don't fully determine the price that a gas station will pay for their product. Most have contracts that determine the price, albeit with future prices factored into that.

Once you've factored in the cost of wholesale gasoline, there are all the other costs that go into the price you pay at the pump.

The US Energy Information Administration estimates that in 2019, when the full-year average stood at $2.60 a gallon, the average transportation and marketing cost was about 39 cents per gallon of gas. Refining costs and profits added another 34 cents on average.

With the volume of gasoline pumped falling by a half or more, many station owners are increasing the profit margin they charge on each gallon by a few cents to make up for the sharp drop in demand.

And then there's gas taxes.

Federal gasoline taxes cost motorists 18 cents a gallon.

State taxes vary widely state-to-state, from about 14 cents a gallon in Alaska to about 60 cents a gallon in California.

But on average, state taxes add another 36 cents a gallon, bringing the average taxes on a gallon of gas to about 54 cents nationwide.

So unfortunately, even though you could buy a whole barrel of crude oil for nothing on Monday, a single gallon of gas will still cost you something.

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