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Cramer: Gas Prices Should Be Much Lower

Wednesday, 30 May 2012 | 7:19 PM ET

Although the price of oil dropped more than 3 percent on Wednesday to the lowest level in nearly six months, the price of gas has not dropped as much as it should, said Jim Cramer on CNBC’s “Mad Money.”

So what gives?

“Gasoline isn’t merely a function of the price of oil,” Cramer explained. “It’s a function of, 1) what oil you’re using, 2) what’s the cost of refining that oil.”

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In the United States, Cramer continued, gas is priced off of Brent crude , a type of sweet crude oil that is used as a benchmark for the prices of other crude oils. Even after the huge decline in oil prices, though, Brent is still trading at more than $100 a barrel. U.S. light, sweet crude fell to around $87 a barrel Wednesday — the lowest settlement since Oct. 21, 2011 — but Cramer noted this type of oil is “almost completely irrelevant” to the price of gas in the U.S. As it stands, the price of Brent oil is the biggest influence on the price of gas in the U.S.

In terms of the refining costs, Cramer noted that there simply isn’t enough refining capacity in the United States to turn the lower-priced oil into additional gasoline. The refining business has struggled lately, so many oil and gas companies have been closing refineries. It seems the cost of updating these facilities to where they are clean enough for government regulators is just too much for American companies, Cramer opined.

Should the price of gas continue to fall, though, Cramer thinks it would help business across the board. Since it would cost less to travel, casino operators would benefit from increased traffic. In turn, hotel companies would also see more business.

Lower gas prices would also make longer commutes more palatable, Cramer said, so homebuilding companies might also be winners. After all, many new home developments are far from where the jobs are.

To Cramer, it’s time to introduce an alternative to oil, namely natural gas. He thinks nat gas should be used as a transportation fuel, but complained that it gets little encouragement from the U.S. government. Perhaps attitudes will change after the presidential election, though, he said.

Read on for Cramer’s Plays on a Potential Housing Rebound

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

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