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why do gas prices fall slowly when oil prices drop?
by Brian ShraderPublished Jul 18, 2008
Views: 681
As the price of crude oil plummeted $15 in three days this week (it seems to be bouncing back a little this morning, as investors speculate that it fell too quickly this week), a lot of people are wondering why gas prices have not dropped as quickly at the retail level.
It's a fine question, and one that the Associated Press answered this week. Here's the answer:
"The cost of oil does indeed affect what we pay at the pump, but the process of getting it from the well to your gas tank takes time. Prices take a while to catch up.
"Oil future contracts being traded now — the ones that hit new records last week but have since seen big drops — are for oil that won't be delivered until next month. That oil still has to travel to a refinery, be broken down into gasoline and other products, and then get shipped again before it reaches your local filling station.
"Another factor: Because of high oil prices, fuel refiners and retailers are making far less on a gallon of gasoline than they used to, and some are even losing money.
"As much as gasoline prices have climbed, the refiners and retailers would like to have raised them even more to cover their costs — but falling U.S. demand has made that impossible. And so, with an eye on their bottom line, they're not likely to lower their prices all that quickly — even with oil prices declining sharply."
A Ph. D candidate at U.C. Berkeley offered another possible explanation in a 2003 paper. Economist and blogger Andrew Chamberlain has a good summary:
"...consumers don’t search much for better prices when they’re falling, but search a lot when they’re rising. When consumers search, markets are more efficient. And when they don’t, markets are less efficient. So when wholesale gas prices fall, gas stations drop prices just enough to keep people from searching much. That makes markets sloppy, and retail prices get pushed down more slowly than up."
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July 18, 2008 6:52 a.m.
But even at those high retail prices, the service stations are making tiny profit margins, at best. As someone at the National Association of Convenience Stores told me, he'd be shocked if any retailer was making a profit on gasoline at these prices.
Of course, the nature of the market is such that if a service station could sell gas for $3.50 and make a profit, they'd be doing it.
GOLO member since July 3, 2007
July 18, 2008 7:19 a.m.
GOLO member since July 20, 2007
July 18, 2008 7:20 a.m.
Bear and I were saying the EXACT same thing just now.
July 18, 2008 7:39 a.m.
That is so true! We used to own a gas station and if we depended on the profits off of gas, we would have starved to death. It's only like pennies on a gallon or it was back then.........
July 18, 2008 7:50 a.m.
GOLO member since March 17, 2008
July 18, 2008 8:17 a.m.
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One thing to keep in mind is that whilst basic greed cannot be discounted as the real reason behind meteoric price rises and glacial price falls, in this particular case...the convenience store operator often has no pricing power for the gasoline in the tanks.
The price is more often than not mandated by the refiner/distributor who owns the pumps at the station as was seen during the spikes after Katrina when a Burlington owner tried to refuse a forced price change only to find his pumps locked the next day (this was subsequently ruled as illegal behaviour but the damage was already done).
I'm thinking the original article is not very well thought out...there's not much point in "searching" the best price when pretty much everyone is at the same price (collusion!) and searching would waste more money than it ultimately saves.
July 18, 2008 9:01 a.m.
But that is not what Lewis found.
“One of the things I documented is that the spread of prices in the city didn't change much. The lowest prices in the city fall just as slowly as the highest prices do. So there isn't the breakdown in collusion that you would expect to see.”
GOLO member since July 3, 2007
July 18, 2008 9:08 a.m.
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He wasn't looking in the right place. The individual retail stations selling refined gasoline are not the problem.
It might appear so when you can drive down the main street in Lillington and see every station at 3.999 as I did yesterday but what's happening there is a decision to remove price as a factor in the consumer deciding where to stop and maybe go into the store where the food and pop are the true cash cows of the operation.
The real problems here are the big oil companies (who are pumping and refining the oil) and the distributors of the gasoline who are making sky-high profits due to speculation in oil because the value of the dollar is in the toilet.
Were it not for those two factors, I'd be hard-pressed to believe that it truly costs nearly half again to move basically the same oil from the well to the gas pump as it did 6-8 months ago.
July 18, 2008 9:58 a.m.
GOLO member since September 5, 2007
July 18, 2008 12:04 p.m.
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