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What goes up must come down, the old saying goes. But, according to Senate Minority Leader Charles Schumer, D-N.Y., that’s not the case for oil prices.
As part of a round of appearances to tout a new Democratic economic-policy agenda, Schumer took a moment on ABC’s This Week to promote his party’s plan to curb mergers that aren’t in the interest of consumers.
"We're going to change the way companies can merge," Schumer said. "We have these huge companies buying up other big companies. It hurts workers and it hurts prices. The old Adam Smith idea of competition, it's gone. So people hate it when their cable bills go up, their airline fees. They know that gas prices are sticky. You know … when the price for oil goes up on the markets, it goes right up, but it never goes down."
However, this broad statement clashes with the long-term data for gasoline and crude oil prices.
There are long stretches over the past four decades when inflation-adjusted gasoline prices have gone down. Here’s a chart from the Energy Information Administration, a federal office that tracks energy statistics.
And here’s the inflation-adjusted data for imported crude oil. The pattern is similar.
Clearly, gasoline and crude oil prices aren’t simply on an eternal escalator to infinity, as one might think hearing Schumer. So what’s going on?
When we checked with Schumer’s office, they said he was referring to the "rise like a rocket, fall like a feather" theory of gas prices. Under this theory, gasoline prices tend to go up quickly if there’s a market shock, then fall more slowly after supply and demand resolve themselves. Schumer sees that pattern as one example of how big companies can sometimes have too much power to control prices, regardless of market forces.
But when we ran Schumer’s statement by Severin Borenstein, a University of California-Berkeley economist who wrote a seminal paper on the rocket-feather theory in 1997, he said the senator’s formulation is off-base.
He said that while it is true that retail gasoline prices decline more slowly than they rise, the time frame for these changes is fairly short -- two weeks to go up, and six weeks or more to go down. Schumer’s statement suggests an iron rule, not a pattern for short-term changes following a market shock.
"You don't have to be an economist or analyst of oil markets to know that the statement isn't correct," Borenstein told PolitiFact. "Obviously, gasoline prices do go down when oil prices decline. The change in gasoline prices since the 2014 collapse in oil prices made that very clear."
Meanwhile, Denton Cinquegrana, chief oil analyst at the Oil Price Information Service, a private firm, said that Schumer’s targets -- monopoly-minded companies -- aren’t necessarily to blame. He pointed to a study of 420 gas stations in San Diego in 2000 and 2001 that looked at the psychology and behavior of consumers.
If a consumer sees a relatively low price, the study found, they won’t bother searching aggressively for a price that’s lower still, even though such bargains may exist around the corner. When such behavior is multiplied across many drivers, gas stations feel less pressure to reduce prices further than they already have, slowing the fall of gas prices.
And economist Philip K. Verleger, who runs the firm PKVerleger LLC, said Schumer may also have an outdated view of how the oil markets work.
"There’s a more competitive market today -- the futures market runs everything now," he said. "The futures can predict your local gas prices, and the response is more symmetric (before and after a market shock) than it was."
Schumer said, "When the price for oil goes up on the markets, it goes right up, but it never goes down."
This comment takes a well-known phenomenon and exaggerates it beyond recognition. While experts agree that prices tend to go up quickly after a market shock but usually come down more slowly once the shock is resolved, this phenomenon only occurs on a short-term basis -- a couple of weeks in most cases. Long-term data show long stretches since the mid 1970s when the inflation-adjusted price of gasoline and crude oil have fallen.
We rate the statement False.
Charles Schumer, interview on ABC’s This Week, July 23, 2017
Energy Information Administration, historical inflation-adjusted gasoline prices, accessed July 24, 2017
Energy Information Administration, historical inflation-adjusted imported crude oil prices, accessed July 24, 2017
Severin Borenstein A. Colin Cameron Richard Gilbert, "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?" (Quarterly Journal of Economics), 1997
OPIS, "University Study: Consumers to Blame When Pump Prices Are Slow to Fall," Dec. 9, 2003
PolitiFact, "Is Donald Trump right that gas prices are now lowest in over 10 years?" July 6th, 2017
Email interview with Amy Myers Jaffe, executive director for Energy and Sustainability at the University of California-Davis, July 25, 2017
Email interview with Denton Cinquegrana, chief oil analyst at the Oil Price Information Service, July 24, 2017
Email interview with Philip Verleger, head of the energy consulting firm PKVerleger LLC, July 24, 2017
Email interview with Severin Borenstein, University of California-Berkeley economist, July 24, 2017
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