Key facts
- Retail gasoline prices are increasing faster than crude oil prices are falling.
- The rocket-and-feathers hypothesis explains this price discrepancy.
- Studies suggest gas stations may be increasing profit margins during periods of falling oil prices.
- Consumer behavior plays a role, as people search less for lower prices when they are falling.
- Gasoline demand is relatively inelastic, meaning consumption changes little with price fluctuations.
President Trump has publicly criticized gasoline retailers for maintaining high prices, a sentiment echoed by consumers experiencing the 'rocket-and-feathers' phenomenon. This economic principle describes how gasoline prices tend to surge rapidly, like a rocket, when crude oil prices increase, but fall much more slowly, like feathers, when crude prices decline. Research, including a seminal 1997 study by Severin Borenstein and colleagues, supports the common belief that retail gasoline prices respond more quickly to increases in crude oil prices than to decreases. This pattern is particularly evident when oil prices fluctuate due to geopolitical events, such as tensions in the Strait of Hormuz.
Economists like Borenstein note that much of this pricing behavior is a retail phenomenon, occurring at the gas station level. Consumer behavior also plays a significant role. When prices are rising, consumers may actively search for lower-priced stations, but if all stations are increasing prices, they might perceive a high price as an outlier. Conversely, when prices are falling, consumers have less incentive to search for alternatives, as prices are generally in line with expectations. This reduced search behavior allows gas stations to maintain higher profit margins during periods of declining crude oil costs. Gasoline demand is also relatively inelastic, meaning consumers have limited ability to reduce consumption even when prices rise, further influencing pricing dynamics.