Gas Price Question?

[TEX]

I see that the price of oil went up a bit overnight and the price of gasoline immediately followed. Up a few cents from yesterday, which is up a few cents from the day before. And up about .10 cents since last week. I was wondering how come when the price of oil falls, it takes awhile for the price of gasoline to fall? A local TV station in Houston did a story on this and reported that the price of the gas at the station has already been paid for so when the price of oil falls, the savings at the pump is not reflected until the supply on hand is expired. Why isn't that the case in reverse?

[Donger]

Originally Posted by Mr. Kotter

But you could have kept it concise, yet accurate: two words...corporate greed.

Or, you could just read why it actually happens.

[oldandslow]

Originally Posted by TEX

I see that the price of oil went up a bit overnight and the price of gasoline immediately followed. Up a few cents from yesterday, which is up a few cents from the day before. And up about .10 cents since last week. I was wondering how come when the price of oil falls, it takes awhile for the price of gasoline to fall? A local TV station in Houston did a story on this and reported that the price of the gas at the station has already been paid for so when the price of oil falls, the savings at the pump is not reflected until the supply on hand is expired. Why isn't that the case in reverse?

The world is about to hit 7 billion people. Many of those people (India & China) want lifestyles that mimic the west. Further, those of us in the west either want to grow or at least continue our present lifestyle. To do this we all need a lot of energy. The amount of oil produced worldwide hasn't risen enough to meet the pressures of more demand - thus an overall upward trend in price - especially since 2000. Of course 2008 derailed the upward climb for a short time, but even the great recession cannot keep oil price down for too long. It is pretty inelastic.

Further, new oil reserves are becoming much more difficult to harvest, thus the price must rise to reflect the energy used to retrieve the oil.

When I was born there were somewhere between 2-3 billion on the planet. Today there is 7 - in 20-30 years there will be 9 billion.

It's called overshoot.

Oil isn't the only thing that is going to become quite scarce.

[TEX]

Originally Posted by Donger

I don't believe that I've ever given a bullshit answer on the subject.

Not as far as I know you haven't. And I KNEW that you would provide me what I needed. I think the local media is all over the corporate greed angle to tie in with the Wall Street stuff. It's like they won't listen to anything else when it comes to the subject. Thank you again!

[banyon]

Originally Posted by Donger

Or, you could just read why it actually happens.

Seems like your link admits there's a real phenomenon of consumers getting squeezed.

Other factors also play a role in this phenomenon, however. One of these can be considered either "profit maximization" or greed on the part of station operators, depending on your perspective.

Sometimes, even after a station has sold all of its expensive gas at that higher price ($2.85 per gallon in our scenario), it will keep pump prices high and pocket an extra 10-cent-per-gallon profit on the cheaper $2.75 per gallon gas. As station operators squeeze an extra dime, nickel or even pennies out of each gallon of cheaper gas, for as long as possible, that lengthens the amount of time it takes for pump prices to fall.

Mainly it sounds like they use one rationale when the price of oil goes up and a different pricing rationale when price of oil goes down. Whichever screws the consumer the most.

It's supposed to be free market supply and demand, right? The SAME pricing laws?

[Donger]

Originally Posted by banyon

Seems like your link admits there's a real phenomenon of consumers getting squeezed.

Sure. It's not uncommon for retailers to recoup losses on previous purchases. They are actually in business to make a profit.

[Frosty]

Originally Posted by Donger

I don't believe that I've ever given a bullshit answer on the subject.

I was just giving you a bad time.

However, the reasoning is still bullshit.

[Amnorix]

Originally Posted by Frosty

I was just giving you a bad time.

However, the reasoning is still bullshit.

You can whine all you want, it's capitalism, pure and simple. Basically gas stations are in competition with each other. You don't like the prices you're paying, then find the cheapest station and go there, or cut out some driving. It's not even unethical much less illegal.

And keep in mind that many gas stations are owned as independent franchises. And their profit margins on gas are VERY slim. So you can bitch, but when the guy owning the gas station has a profit margin of <5%, I think your bitching is pretty seriously misplaced.

http://seattletimes.nwsource.com/htm...tailers30.html

Retailers last year earned an average of 2 to 3 cents per gallon before taxes, said Jeff Lenard, a spokesman for the Alexandria, Va.-based National Association of Convenience Stores.

[Calcountry]

Originally Posted by Donger

Yeah, I could write it all out (again) or just give you a link. I'll do the later:

http://www.dailyfinance.com/2011/03/...t-fall-slowly/

It's a well-known law of physics that everything falls at the same rate. But as frustrated motorists have had reason to notice lately, that law doesn't apply to gas prices. You aren't imagining it: Usually, the price of gas rises much faster than it falls.

This phenomenon has held true for decades, and recent price trends have been no exception. On Thursday, the retail price for regular unleaded averaged $3.52 per gallon in the U.S., up a massive 37 cents in just one month -- and a whopping 60 cents, or 20%, since December. Several different factors have contributed to this trend.

In many cases, gas price hikes are tied to wholesale prices. Many gas stations have contracts that require them to raise their prices as soon as their suppliers -- often oil companies -- raise theirs. Some gas stations also anticipate higher wholesale prices and hike their prices in advance to make up for the expected gap.

Here's an example: If the price of oil increases $5 a barrel, it will typically cost an additional 10 to 12 cents per gallon -- in wholesale prices -- for the retailer's next delivery. Gas station operators know this, and often will immediately increase the pump price of gasoline 10 to 12 cents in response. When they do this, retailers are essentially basing their prices on the cost of replacing the gasoline that's being used, rather than on the price they originally paid for that gas, to help even out their cash flow.

Smoothing the Cash Flow

The opposite happens when gas prices are dropping, leading to slower decreases as gas station operators hold off on lowering their prices in order to cover the earlier costs of buying more expensive gas. Here's a simplified version of what happens (excluding taxes and the cost of environmental regulations that also affect gas prices): Say you're a gas station owner who buys 10,000 gallons of regular unleaded gasoline -- a month's worth -- at Wednesday's wholesale price of $2.85 per gallon. Your bill comes to $28,500.

Imagine that you sell 9,000 gallons over the next three weeks, but then the price of oil drops, bringing the wholesale price for gas down 10 cents to $2.75 per gallon. You'll be able to buy your next 10,000 gallons at the lower price and cut your pump price by 10 cents per gallon as a result, but if you reduce your prices right away, you wouldn't cover the cost of the remaining 1,000 gallons of gasoline that you already bought at the higher price. Most likely, you'd wait until you'd sold those 1,000 gallons before cutting your price.

In this way, as retailers wait to cover the costs of the higher-priced gas still in their tanks, gas prices decline more slowly than they rise.

Maximizing Profits

Other factors also play a role in this phenomenon, however. One of these can be considered either "profit maximization" or greed on the part of station operators, depending on your perspective.

Sometimes, even after a station has sold all of its expensive gas at that higher price ($2.85 per gallon in our scenario), it will keep pump prices high and pocket an extra 10-cent-per-gallon profit on the cheaper $2.75 per gallon gas. As station operators squeeze an extra dime, nickel or even pennies out of each gallon of cheaper gas, for as long as possible, that lengthens the amount of time it takes for pump prices to fall.

If stations are all inclined to keep prices high, what persuades them to cut them? Competition, of course. If an area contains multiple gas stations, all of which want to boost their market share, one or two will inevitably lower their prices by a penny or two (or more) in the hope of increasing sales. Others will respond by cutting their prices too, until the pump prices finally reflect the reductions in the wholesale price.

Gas stations equipped with convenience stores, which generally earn more money from store sales than gas sales, typically can afford to lower their prices first. Meanwhile, some stations keep their prices high for other reasons -- they might not have much competition, for instance, and might not be concerned about losing a few customers -- but in general, the rule of competition applies.

The Power of Customers

And that means that customers do, in fact, have an impact on prices. To start prices on their slow journey downward, you need to shop around.

That said, customers' control over prices is limited. The largest factor in gasoline's price is still the price of oil, which has remained above $60 per barrel for the last 20 months. Oil prices have been rising -- albeit with volatility -- since December 2008, when they hit a low of about $35 per barrel during the financial crisis.

Given the current global trends in oil supplies and demand, it appears that the best way to cut your gasoline bill for the foreseeable future is to drive less, such as by carpooling more, using mass transit or buying a more fuel-efficient vehicle.

In economics, the term is "ratcheting effect".

[Calcountry]

Originally Posted by Donger

Or, you could just read why it actually happens.

Yes, it even happens in small businesses.

[Calcountry]

Originally Posted by banyon

Seems like your link admits there's a real phenomenon of consumers getting squeezed.



Mainly it sounds like they use one rationale when the price of oil goes up and a different pricing rationale when price of oil goes down. Whichever screws the consumer the most.

It's supposed to be free market supply and demand, right? The SAME pricing laws?

You have never had to maintain an inventory, have you?

[banyon]

Originally Posted by Calcountry

You have never had to maintain an inventory, have you?

No, why?

[Phobia]

Originally Posted by banyon

No, why?

Because if the price on something goes up while it's in stock then you just added money in your wallet - just like if the price goes down while you're holding a bunch of product then you get screwed. Win some, lose some. The idea of being a good businessman is to win more than you lose. The gas stations themselves aren't to blame for the patterns questioned in the OP.

[banyon]

Originally Posted by Phobia

Because if the price on something goes up while it's in stock then you just added money in your wallet - just like if the price goes down while you're holding a bunch of product then you get screwed. Win some, lose some. The idea of being a good businessman is to win more than you lose. The gas stations themselves aren't to blame for the patterns questioned in the OP.

Your post talks about prices moving up and down, but the focus here is on why the rate of price change (price acceleration) is different when dealing with the same product.

[Taco John]

But don't businesses exist to provide me with good deals?

[jspchief]

Originally Posted by Phobia

The gas stations themselves aren't to blame for the patterns questioned in the OP.

Of course they are. The link Donger provided spells it out clearly.

They raise the price in anticipation of increased wholesale costs, even if that means selling gas they already bought for a higher margin, but they lower prices more slowly so as not to sell for a lower margin.

Plainly put, the issue isn't the slow decline of gas prices, its the rapid increase. And it happens rapidly because it briefly allows for higher profit margins.