Middle East Conflicts Fuel Asymmetric Price Transmission

The recent conflicts in the Middle East have led to a surge in crude oil prices, but the corresponding drop has been slow. Virginia Tech Economist Jadrian Wooten attributes this phenomenon to 'asymmetric price transmission,' also known as 'rockets and feathers.' This means that prices shoot up quickly when costs rise, but take their time to come back down.

Wooten explains that fuel station owners raise prices before the next delivery to protect their margins on future inventory. They don't care about the cost of existing fuel, only what it will cost them to refill their tanks. This is not just limited to gas stations; truckers, farmers, and others in the supply chain also watch costs closely.

The slower lowering of prices can hurt businesses, as retailers may keep prices elevated until competition forces them to lower them. Wooten identifies three key factors driving this asymmetric response: inventory repricing, search costs, and margin recovery. Fuel stations won't sell existing fuel at a loss, drivers will stop searching for the lowest price when prices start falling, and station owners will rebuild lost margins.