Explain the volatility in gas (fuel) prices, please.

Can someone explain to me, in relatively small words, why the price of fuel at gas stations fluctuates so much? One day, average price is $3:15, next day it’s close to $3:50. Today I saw gas in my county priced from $3.09 to $3.27, within blocks and in the same city.

Also, since fuel prices affect so much of what we buy or use (by manufacturing and transportation), why don’t other commodities have a similar price fluctuation to reflect the price of oil?

Two possible reason why oil price fluctuations don’t influence the prices of what we buy much, at least in the short term:

  1. Oil prices are a small part of the cost of production of most goods. Their influence is usually not noticeable to the consumer.

  2. Well organized businesses may enter into contracts where the price of oil is locked in (or contracts which are functionally equivalent to the price being locked in).

Why the price is different from one location to another:

  1. The seller thinks he can sell it for that much. For many people, the time saved is of more importance than the dollars they save by going out of their way to get the very cheapest gas.

As for general price fluctuations, that likely has to do with the secondary market for oil which is liable to fluctuate widly since it’s speculation.

I have heard it argued that the cost of gas at your local gas station goes up rapidly when the market price of petroleum rapidly rises, as the station owners price their gas in such as way as to reflect the cost that they will have to pay to re-fill their gasoline storage tanks. Thus, as a rise in the price of crude will be expected to increase the wholesale cost of gasoline, they change the price of their gas accordingly.

That said, it does seem that while the retail price of gas is extremely responsive to upward changes in the price of crude oil, it also seems like it takes much longer for the retail price of gas to come back down when the price of crude drops.

They do; it just seems to take longer for those price changes to make their way through the system. Prices of food, for example, increased noticeably in the wake of Hurricane Katrina in 2005 (which led to a rapid increase in the price of crude oil).

I don’t want to hijack this thread, but I wonder if discussing a different system might illuminate some of the original. (Sort of a compare and contrast type of situation.)

In Ontario, the price of gas seems much more stable – so much so that every station in town seems to be within .3 cents of each other (yes, gas prices here are to the tenth of a cent but that tenth isn’t always 9!), and they’ll even announce on the radio if gas prices are going to change the next day, and by how much.

Ontario (Canada?) is obviously doing something(s) very different from the US, but what?

While there are undoubedly several logical/legitimate factors that influence gas prices, I think a major factor is “what the traffic will bear.” Fact is, we’re so addited to our cars that we’ll pay almost any price. FYI, I’m told our local Costco stores check retail prices with a one mile radius of each store and price their fuel a penny or two less.

I think a lot of it has to do with fluctuating demand, limited stroage space, what the traffic will bear and the need to keep the refineries cranking. They go 24/7. Between travel and payday, more gas is bought weekends. An easy way for the refiners to encourage mid week purchases is to drop the price mid week. One huge storage facility is car gas tanks. Mine tends to be full when the price is down, and empty when it is high. I try to manage not to to have to buy gas the day it jumps $.20.

This variation, around 6%, is called Competition. It’s just more visible with petrol because the price is advertised on the street: if baked beans or milk prices were that visible you’d see the same variation in a drive.