Several weeks ago, a friend asked me why, when oil prices had fallen to a third of what they were a year ago, gasoline prices had fallen by less than half of what they were then. And the other day, I heard some talking-head mediot* ask,
"So tell me this: if oil has fallen from $140/barrel to $50, why have gasoline prices only fallen from $1.29/litre to $.79/litre? Huh?"
Here is a graph of a few of the observed data points to which they were referring:
[Update: several people were confused by the original graph, so here is a better-labeled one. It is a scatter plot of the price of gasoline versus the price of oil at three different points in time:]
Applying the famous "Palmer Eyeball Algorithm" to these data and completely ignoring the lack of degrees of freedom, it appears that gasoline in Ontario is roughly priced at about $.55 x [1+ (price of oil)/100]. In other words, about 55 cents of the price of a litre of gasoline is due to other costs that do not vary with the price of oil. These costs include, of course, taxes, but they also include the bulk of labour and capital costs as well. These costs cannot be altered much as the price of oil changes, and hence their influence on the price gasoline cannot change much when oil prices change.
It is nearly a linear relationship, but because of the comparatively fixed costs, the relationship is not proportional.
Finally, did you ever notice that the people who complain when gasoline prices don't fall in proportion to a fall in oil prices do not express gratitude when prices rise less than proportionally with oil prices?
*mediot: a contraction of the words "media" and "idiot".