Despite a notable decline in crude oil prices since their peak in April, retail gasoline and diesel prices have not fallen correspondingly, highlighting a growing divergence between oil markets and pump prices. By the end of July, crude oil prices were down roughly 25 percent from their spring highs, yet gasoline prices had only decreased about 9 percent from May’s peak of around $4.50 per gallon. Diesel prices, meanwhile, remained relatively elevated, reaching $5.47 per gallon nationally.
This disparity stems primarily from disruptions in refining capacity rather than crude oil supply itself. Industry experts point to the “crack spread”—the margin between the cost of crude oil and the prices of refined products such as gasoline and diesel—as a more accurate indicator of consumer fuel costs than crude prices alone. The “3-2-1 spread,” which reflects the typical conversion of three barrels of crude into two barrels of gasoline and one barrel of diesel, illustrates the financial pressures facing refiners.
When crude prices drop faster than fuel prices, refiners and retailers experience a widening crack spread, leading to the so-called “rocket and feather” phenomenon. Under this effect, fuel prices surge quickly when crude costs rise but decline slowly when crude prices fall. Retailers tend to pass along wholesale price increases rapidly to protect margins but delay reducing prices when wholesale costs drop, often waiting until competitive pressures or consumer awareness compel them to adjust.
Several geopolitical and logistical factors have compounded the refining bottleneck. Ukraine’s ongoing drone attacks have significantly damaged Russian refining infrastructure, potentially reducing that country’s refining output by up to 28 percent compared to last year. Similarly, conflicts in the Middle East, particularly tensions between Iran and the United States, have impaired refinery operations and disrupted shipping routes like the Strait of Hormuz. Although crude production in these regions is recovering, refinery output remains below pre-conflict levels, contributing to tight global fuel supplies.
The shortage of operational refineries is of particular concern because roughly 9 percent of global refining capacity remains offline. This shortage is especially impactful for diesel, as Russian and Middle Eastern refineries produce a larger share of diesel relative to U.S. refineries, which focus more on gasoline. Consequently, diesel prices have remained relatively more robust amid the supply constraints.
China’s role adds another layer of complexity. As the world’s largest crude importer and refiner, China has cut crude imports to preserve domestic stockpiles and constrain costs, a move that has alleviated some pressure on crude oil prices internationally. However, China has also limited exports of refined products such as gasoline, diesel, and jet fuel, tightening supplies on the global market and contributing to elevated fuel prices elsewhere.
The persistence of high wholesale gasoline and diesel prices—up about 59 percent and 69 percent respectively over the past year, according to Energy Information Administration data—has wider economic implications. Diesel’s critical role in transportation, agriculture, and construction means elevated prices translate into increased costs for goods and services. These increases have prompted measures such as the U.S. Postal Service’s temporary rate hikes on package deliveries. Additionally, jet fuel prices, projected to rise roughly 70 percent this year, are driving up airline operating expenses and airfares.
Analysts caution that the global challenge lies less in crude oil availability and more in insufficient refining capacity. With relatively few new refineries under construction worldwide, the gap between crude supply and refined fuel output may persist, keeping consumer fuel prices elevated and complicating efforts to moderate inflation.