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why do gas prices fall slowly when oil prices drop?
by Brian ShraderPublished Jul 18, 2008
Views: 686
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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As prices rise, people get used to paying a certain amount so they are willing to keep paying more. And, retailers have to make back their money on the higher priced gas.
GOLO member since July 7, 2008
July 18, 2008 4:34 p.m.
Check the profit margin on any company that refines oil from the middle east...tell me that they aren't making any money...gas isn't the only product that comes from that oil and I am sure by the time its all refined into everything they can squeeze out of it they have made a profit. Those who refine oil aren't in it to lose money, they make theirs and the consumer is the one who pays for it. Isn't it funny how when the stock price goes up we see and feel it within days, but when it does go down like the last few days we hardly see any change...thats where some of that money is made by the refinery and anyone who pays attention should have figured it out by now. I am sure ratailers don't make a fortune because I have friends in the business, its the store that brings in the money from snacks, cigs, and beer.
GOLO member since July 6, 2007
July 21, 2008 8:52 a.m.
July 21, 2008 2:19 p.m.
July 26, 2008 11:40 p.m.
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