In a nutshell, why are gas prices so high?

It’s nearing 3 bucks a gallon around here. What the hell? Is the earth suddenly running out of fossil fuels?

In a nutshell. New Orleans is one of the top refinery locations. Gas stations react with a hair trigger to oil fluctuations.

By React I of course mean they raise prices. They are somewhat slower to lower prices.

Maybe this would be a great thread for this question.

Gas Station buys the tank of gas for 2.64.9 a gallon fills it up on Sunday sales it for 2.72.9 a gallon (based on a local news anchor saying gas stations typically charge between a nickel and a dime profit)
Now comes Monday and Katrina causes future prices to rise. Is it wrong (illegal) for that gas station to boost the gas he paid 2.64 for, to 3.19.9 since he won’t be buying that expensive gas until the next time he fills his tanks.

If its not illegal is it even close to price gouging? Or just something I personally find wrong.

Or am I so completely wrong with how its done that I should be taken out back and whipped like a three legged dog that bit your genitals?

“Because they can.”

When asking why does X cost Y? this is almost always the answer. Any other reason is merely an excuse.

jrfranchi’s got it.

I can’t answer the price gouging question, but I have one of my own. Whaddaya bet this price-rise will be pitched as a reason to drill in the Alaskan Wildlife Refuge? Even though the prices and shortages are clearly an issue of refinery capacity, not oil supply?

Is foreign-source oil stacking up in the Gulf right now, waiting to be refined?

When there’s a freeze in Florida, California orange growers benefit.

More generally, gas stations run on pretty thin margins (about 12%): the black gold that they make their money on is coffee and other convenience store items.

Is that “fair”?

Retailers apparently make higher margins on premium grades of gasoline. Is that fair?

Yes, it’s been shown that gasoline retailers increase their prices faster than they lower them, indicating some degree of local market power. (Deltas 2004, Borenstein et al). Still, they’re only 12% of the picture.

People are anticipating further price increases, so they are keeping their tanks full, when the would not otherwise. If everybody is driving around with a mostly full tank, instead of letting them get empty before refilling, the result is a spike in demand. All that fuel is stored not at filling stations or distributors, but in the tanks of the customer. Increased demand = increased price. It is an example of how consumer psychology can have a real effect on the market.

OK, so with the rising prices, where is the money going? Is it all to holders of futures contracts; is it to the distributors (I know that for the most part it’s not the gas stations)?

If he raises the prices now, any extra profit will be put into the rise in price when he gets his next gas delivery.

The rational approach for a retailer is to base his prices on the expected cost of his next order for goods, not on past costs.

Say you buy a house for $100k and 5 years later must sell & move because your company relocated. Houses like yours are now selling for $180k, both where you are and where you’re moving. Do you base your asking price on what you paid, or on what the market says your house is now worth to typical buyers (and thus what you’ll have to pay to replace it)?

The gas retailer with a full tank in the ground wants a week from now to end up with money in his pocket and his tank again full. He must thus charge something more than what the new load of gas will cost him.

Note that this cuts two ways: If prices are falling, he must cut his - perhaps below his costs - in order to keep selling gas. Say two gas sellers each paid $2.50/gal for the 3000 gallons of gas that’s in their tanks. The price of wholesale gas then drops to $2.20. Local retail prices drop from $2.70 to $2.40.

Merchant A drops his price to $2.40, sells his normal 3000 gals/week and starts next week with a full tank and a $600 profit (.20/gal on 3000 gals).

Merchant B says “No way I’m selling my $2.50 gas for $2.40.” He holds his price at $2.70, and sales drop to near zero (no one will pay $2.70 when the price down the street is $2.40). He starts next week with a nearly full tank and very little profit (actually a loss, since his costs for rent, payroll etc. didn’t change just because business was down).