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Good Question: Why Aren’t Gas Prices Falling Quicker?

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(credit: CBS) Jason DeRusha
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MINNEAPOLIS (WCCO) — At this time last year, crude oil was around $80 a barrel and gasoline prices were around $2.80 a gallon. On Tuesday, crude oil is close to $80 and gas is around $3.40. So, why aren’t gas prices that low now?

“Prices rise like rockets and fall like feathers,” said Mark Bergen, and expert in pricing at the University of Minnesota’s Carlson School of Management.

Indeed, the last time crude oil was at $80, prices were on the way up. So, prices went up to $2.80 a gallon. This time, oil is on the way down.

“When costs go down, as a seller, I’d love to stay up at that higher price point as long as I can. And so there’s a tendency to try to go down a little bit more slowly,” Bergen said.

There are two other structural differences with gasoline comparing this year to that.

“Gas doesn’t necessarily track off of West Texas crude, which is the most commonly quoted crude in the media,” said Sterling Smith, a commodities market analyst based in St. Paul.

West Texas Intermediate crude closed Tuesday around $84 a barrel.

“All crude is not made the same,” said Smith.

Over the past year, U.S. gas prices have tracked more closely with another kind of crude: Brent.

Historically, Brent has been priced just a couple bucks higher than West Texas crude. It’s considered easier to refine and it’s a little more expensive to pull out of the ground.

Starting late in 2010, however, the price of Brent and West Texas crude began to diverge drastically.

As of Tuesday, “the Brent crude is sitting about 109, that spread is getting wider again,” said Smith.

So, while West Texas crude prices have dropped, Brent crude prices are not nearly as low. Gas stays more expensive.

Also consider the corn factor. Ten percent of Minnesota’s gas is made of ethanol.

The last time West Texas crude was at $80, “corn was $3.75 a bushel. It’s nearly $7 a bushel now,” said Smith. “That’s also affecting the price of gas and part of the reason why gas prices are not coming down.”

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