When Oil Prices Drop, Why Do Gasoline Prices Stay Elevated?

The U.S. conflict with Iran, which began on Feb. 28, 2026, demonstrated the speed at which surging crude oil prices affects the price of its most important product, gasoline. Tracking the prices of both also shows a perennial issue at the pump: While quick to rise with crude oil, gasoline prices fail to decline in lockstep with falling crude oil prices.

In this blog post, we examine the rise and decline of oil and gasoline prices during the conflict, particularly in its first four months, and offer some economic explanations as to why gasoline prices behave in this manner.

Oil and Gasoline Prices following the Start of the Conflict

On Friday, Feb. 27, the price of a barrel of oil (specifically, West Texas Intermediate oil, or WTI, an international benchmark settled in Cushing, Okla.) was $66.96. By Friday, March 6 — one week later — this same price had risen to $90.77. Gasoline prices soon followed. On Monday, Feb. 23, the average price of gasoline in the U.S. was $2.94 per gallon; one week later, the average price of gasoline had risen to $3.02 and, two weeks later, it surpassed $3.50.Gasoline prices in FRED (GASREGW) are measured on Mondays at a weekly frequency. FRED reports daily oil prices (DCOILWTICO).

During the next three months, both oil and gasoline prices continued to rise. The oil market experienced excess volatility, while the gasoline market experienced less volatility. Oil reached a high of $114.58 on April 7 and stayed over $85 during this period. Gasoline reached a weekly high of $4.50 on May 11. The accompanying figure shows oil (WTI, daily) and gasoline prices (all formulations, weekly) for the period starting Jan. 1, 2026, and ending Aug. 3.

Following the announcement of a ceasefire between Lebanon and Israel on June 3 and the signing of a preliminary agreement between the U.S. and Iran on June 17 to end the conflict, oil prices declined from $99.76 on June 3 to $69.60 on July 6. While gasoline prices came down from their peak ($4.50 in May), they still hovered around $4 as of July 6 ($3.78). Before oil prices rebounded with the resumption of hostilities, some openly wondered: If oil prices had almost returned to their levels before the conflict, then why were gasoline prices still elevated?

Gasoline and Oil Prices Are Closely Related but Do Not Move One-for-One

Gasoline prices are composed of four primary costs: crude oil (the material input), refining, taxes and transportation. While oil contributes the largest share to the input price of gasoline [around 50%, according to the Energy Information Administration (EIA), depending on location], variation in taxes and transportation costs can also move the retail price.See this 2014 St. Louis Fed article “Rockets and Feathers: Why Don’t Gasoline Prices Always Move in Sync with Oil Prices?” for a full discussion. Thus, when the price of oil increases, the price of gasoline also rises but not one for one.

The EIA estimates a rule of thumb in which the price of a gallon of gasoline changes about 2.4 cents per dollar change in the price of a barrel of oil. This relationship is not exact nor is it constant over time; it can change seasonally when the formulations of gasoline change or vary in magnitude with the direction that oil prices move. Specifically, gasoline prices seem to change faster when oil prices are rising than when they are falling, an asymmetric relationship that is often referred to as “rockets and feathers” (e.g., a common phrase is “rise like a rocket but fall like a feather”).

An Asymmetric Relationship

Using an econometric model (the details of which we won’t discuss here because we want the reader to stay awake), economists have measured the speed at which gasoline prices adjust to changing oil prices. The model assumes there is an equilibrium relationship between oil and gasoline prices. If current gasoline prices are above the equilibrium price, the model suggests that there should be downward pressure because oil prices would imply a lower price of gasoline. The model further allows the rate at which gasoline prices adjust to oil prices to depend on the direction oil prices are moving.

As an illustrative example of the model, we used it to estimate how long gasoline prices would have remained elevated above their preconflict levels if oil prices had returned to their preconflict levels by July 20 and remained flat thereafter.

Estimating the model using data from Jan. 21, 1991, through July 7, 2026, we found that deviations put pressure on gasoline prices to return to equilibrium; the speed of this return, however, is estimated to be faster when oil prices rise than when they fall. In our experiment, the model suggests that it would take about six months for gasoline prices to fall within 25 cents of their levels before the conflict.This result represents a hypothetical scenario and should be treated as merely an illustrative example of the model under very specific assumptions. It is not to be considered a forecast.

Several factors may explain this asymmetry. One is that gasoline stations have seller market power and can capitalize on changing prices to maintain a higher profit. A 1997 paper by economists Severin Borenstein, A. Colin Cameron and Richard Gilbert found that retailers raise prices following an increase in oil prices to maintain a profit margin; however, they are slow to lower prices because consumers shop for gasoline relatively infrequently and become accustomed to higher prices. Another factor is a disruption in the supply chain of gasoline. Whenever disruptions occur, such as Hurricane Katrina’s impact on the Gulf of Mexico in 2005, refiners can mitigate anticipated shortages by raising prices to discourage consumption.

These are potential reasons why gasoline prices might remain high for consumers for the foreseeable future, especially if the U.S. and Iran remain in conflict.

Notes

1. Gasoline prices in FRED [GASREGW] are measured on Mondays at a weekly frequency. FRED reports daily oil prices [DCOILWTICO].
2. See this 2014 St. Louis Fed article “Rockets and Feathers: Why Don’t Gasoline Prices Always Move in Sync with Oil Prices?” for a full discussion.
3. This result represents a hypothetical scenario and should be treated as merely an illustrative example of the model under very specific assumptions. It is not to be considered a forecast.