How Decreases in Oil Translate at the Pump

July 21, 2008 — -- Drivers received a brief reprieve from soaring gas prices when the price of oil dropped $16 a barrel last week, but consumers should pump the brakes on the idea of a large, instant price reduction at their local stations.

"I do not think that lower oil prices will mean lower prices at the pump immediately," said McGuire Energy Institute director Bruce Bullock.

Though the price decrease of crude oil last week was the biggest three-day drop in decades, it only resulted in easing the nation's average cost per gallon from $4.11 to $4.07, according to AAA.

Economists said roughly every dollar change in the price of oil moves the price of gasoline two-and-a-half cents. So, a $16 decline in oil prices should produce a 40-cent drop in gasoline prices.

But such a decrease takes time to show up at the pumps. AAA predicts if the price of oil can stay below $130 a barrel — and that's a big if — the price at the pump will decrease even more.

"We should see the national average price of gasoline drop from where it is today around $4.11 per gallon to below $4," said Geoff Sundstrom, of AAA.

Drivers aren't the only ones who would benefit from such a decline. The country's major airlines also need a break from sky-high jet fuel prices, which have grounded flights, forced carriers to raise ticket prices and lay off employees.

Oil would have to slide much further to take the pressure off the airline industry and McGuire Energy's Bullock predicted the price per barrel will likely increase.

"I think over time we will see $150 a barrel, certainly by the end of the year," Bullock said.