If the barrel price of of oil drops why do gas prices drop almost instantly?

[astro]

From a barrel of purchased oil to the gas station is a trip involving lots of intermediate steps and I imagine some degree of time. I would also think the producers, distributors and vendors (ie stations) have fixed invested costs in the gas. Why are fluctuations in the price of oil reflected almost instantly in gas prices?

If gas drops 40 cents in a week isn't the gas station owner potentially losing money with every tankful he sells if he bought it when gas was 40 cents higher? Why the virtually instant response in end user prices when the barrel-head commodity price rises or drops?

[Duckster]

WAG - The same scenario applies when the price of a barrel of oil goes up, immediately followed by the price at the pump. In this case, the oil companies take an immediate profit boost because the time lag when oil from the wellhead to the pump can be 60 to 90 days. At the same time, if there is an immediate price drop at the pump when the barrel price drops, the oil companies take an immediate lost. When you add the two together, it's an apparent wash.

Keep in mind when the oil companies raise the price at the pump as the price of oil goes up, a shrewd bean counter for an oil companies would invest the excess profits. So when a few months later the barrel price drops (and at the pump) that shrewd bean counter will withdrawal the earlier excess profits to cover the "loss." However, when you invest tens of millions on the upswing, only to withdrawal those same millions a few months later, the oil companies still make money on the short-term interest. It's a high-stakes game of playing the float to the max.

[Really Not All That Bright]

Go here and click on the "show crude oil price" box. As you'll see, there's a much weaker correlation than would be expected.

Certainly not instant retail drops to match crude price drops.

[IAmNotSpartacus]

I asked this awhile ago and the general response was the the price of the current product was dependent upon the cost of the next resupply.

[Really Not All That Bright]

Originally Posted by Duckster

In this case, the oil companies take an immediate profit boost because the time lag when oil from the wellhead to the pump can be 60 to 90 days. At the same time, if there is an immediate price drop at the pump when the barrel price drops, the oil companies take an immediate lost. When you add the two together, it's an apparent wash.

Just FTR, oil companies generally don't own and operate gas stations; they're franchises. The station operators buy gas from the oil company at bulk retail rates.

[Boozahol Squid, P.I.]

Originally Posted by Really Not All That Bright

Just FTR, oil companies generally don't own and operate gas stations; they're franchises. The station operators buy gas from the oil company at bulk retail rates.

According to the guy who owns the Shell station across from my hospital, despite the fact that he's an independent station, his contract with Shell essentially states that the gas is theirs while it's underground: he sells the gas at a fixed profit, and adjusts his prices based on what the distributor calls into him.

[Paul in Qatar]

Because you are not paying for the gas in the station's tank. You are paying so the guy can buy the next tank of gas (plus some profit margin). If the next load of gas will cost twice as much next week you must pay twice as much now so the station guy can order more gas.

[unspun]

I'm curious as to how futures contracts play into this. Do fuel providers not purchase more than one month in advance?

[Leaffan]

Consignment inventory. The gas station doesn't own the gas, the oil company owns it until it's sold to the customer.