Consider how quickly gas companies raise prices during crises such as Kuwait and Katrina claiming higher current oil prices. Now consider how slow they are to lower prices by claiming delays in processing (oil bought today won’t be in the pumps for a while), when will Congress investigate how gas companies manipulate the prices?
Aren’t various local police groups looking into this now? I don’t know what the answer is for Congress, but it’s pretty obvious that a hurricane or another event that affects the flow of gasoline is going to make prices go up.
Well, it would seem kind of silly, given that the purpose of the Dept of Energy at the fed level is to ‘fix’ energy prices. I mean, part of the purpose of the Iraq war was price protection for US oil companies anyway; the current high prices were to some extent planned. Thats ~why~ the DOE exists, price stability; meaning protection from competition and the lower prices stemming from competition. It would be easy to lower prices tomorrow…just a phone call to the head of the DOE. But, the game has to be played; the ‘national oil reserve’ (which exists to take supplies off the market to protect prices from dropping too low) will be tapped, ostensibly to lower prices, but since it will be refilled again from the very same companies it is ostenibly competing with, we’re basically getting fucked without a reacharound and with a hole in the condom.
The behaviour of gas prices at the pump is a well understood phenomenon, and has nothing to do with price fixing.
So explain to me how the Invasion of Kuwait, Hurricane Katrina, etc. can raise prices of gas in the pumps even though that gas was process before that event. Incidently, how long does it take to go from crude oil to gas at the station?
Well, the basic idea is that prices equilibrate between supply and demand. When the supply is suddenly cut, demand has to go down or else there will be a shortage, i.e., people will want to buy more gasoline than is now available. The way to make demand go down is to raise the price.
Of course, in the real world, things can get a little messier than I outlined above in that steep rises in prices can lead to even stronger demand in the short-term as people start to horde gasoline in fear of future shortages or price rises. But, fortunately, there is only so much hoarding of gasoline that people can do since their gas tanks are not that big.
Because the price pumps charge is based not on the price they paid for the gas currently in their inventory, but the replacement cost of that gas. And that is driven by the laws of supply and demand. Basically, if a gas station expects the next shipment of gas to be 20% higher, they are going to raise their prices NOW to compensate. Again, because gas is a fungible commodity, the value of the gas sitting in the underground tanks of a gas station is worth exactly the same as gas sitting in the reservoir at the refinery. When price goes up, it goes up right away.
Commodities behave this way all over the place. Do you claim there is price fixing because milk of the same grade is generally the same price everywhere? (It varies more than gas, because of differences in packaging, economies of scale in large grocery stores, etc.)
Or look at it another way: What if gas prices at the pump DIDN’T move together? What would happen? What would happen is that the places with the lower prices would rapidly run out of gasoline because they would attract huge crowds. That actually happened here last week - the price of gas on the south side of the city started to increase, and by the time the last stragglers on the north side increased their prices they already had long lines of cars at their pumps. It’s amazing how fast this information moves through the market.
And what if gas prices at the pump didn’t change until they got a new, more expensive batch? Well, I might just roll up my tanker truck and buy up all that $2.00/gallon gas, since I can get it for less than what I’d normally buy it from the refinery. Every time there were price hikes in the cost of crude, you’d see runs on gas stations as people buy up the ‘cheap’ gas. So pump prices have to move with the market to keep everything in equilibrium.
Oh, and as for why they don’t fall as fast with price declines - That’s a little tougher, but I’d suspect it has to do with the inelasticity of demand for gasoline. The mechanism for lowering prices is basically competition. So a gas station buys an inventory full of gas for $2.50/gallon. Now the price of oil drops. Well, they’d like to get their $2.50/gallon for their current gas, so they leave the price where it is. In the short run, people need to buy gas, so they buy it at higher prices. Eventually, competition takes over and prices start to fall, but the mechanism for that probably isn’t as fast as the mechanism that controls price hikes (i.e. if a gas station sets its price too low, it will experience a run on gas. But if it’s too high and so is everyone else, people won’t stop buying, because they don’t have the option of going to the refinery to buy the new gas at the new lower price).
This is mostly speculation on my part - I haven’t actually read a study on why gas prices fall more slowly than they rise, if they do. So don’t take this as authoritative. I’m just trying to show that the mechanism for driving down gas prices is not necessarily the same as the mechanism that drives them up, and you don’t need price-fixing accusations to explain it.
And that was my whole point. I remember that a few months after Desert Storm, the executive of some oil company was explaining that gas prices were still high because that gas was made from the oil purchased with the expensive oil during the Kuwaiti war. That seems resonable, except it took them about a day to increase prices once the oil prices skyrocketed because they were already paying higher prices for the replacement oil.
I like your explanation and it makes sense, but why are the oil companies allowed to have it both ways - raising prices based on supply costs and gradually lowering prices to the point of equilibrium. I know that’s how businesses work, they’re only trying to make a profit, blah blah blah; and day-to-day that’s fine. But if they’re going to jack up gas prices during crises based on the price of oil, they should be required to return to the equilibrium price as soon as the crisis is over and oil prices are lowered. Whether it price-fixing or profiteering, oil companies should not be allowed to keep high gas prices for months after the oil prices has risen and fallen.
By what mechanism would you force the oil companies to lower prices?
I don’t think you do understand how business works. Frankly, the oil companies can change any price they can get-- excepting, of course, if they vioate laws about price gouging. But those price-gouging laws would stop them from raising prices in the first place if they were applicable.
Typically what happens is that there is a rumor or news of a supply interruption. Prices go up immediately. Until and unless the supply actually does return to normal (or is widely expected to return to normal) the prices are going to remain high. Markets don’t like uncertainty, and it’s easier to react to uncertainty in the negative direction (ie, raise prices) than in the positive direction (ie, lower prices in anticipation that “things will surely get better soon”).
FWIW, this is the excuse I’ve heard (judge for yourself): gas station owners aren’t exactly rich. If gas will cost $0.50 more on the next delivery, then they’d have to fork over $5,000 extra for the next shipment of 10,000 gallons or so. Therefore they have to raise prices now, in order to be able to afford the next (and more expensive) shipment.
Right now, many gas station owners probably can’t even afford the full shipment amounts, which would explain the spot shortages.
Er, inelasticity is a symetric concept: neither price rises nor price falls change quantity demanded too much.
Ok.
I’ve skimmed some of these studies. Retail establishments pass on wholesale price increases faster than wholesale price decreases. One cite.
WARNING PDF:Better cite [/Warning pdf]
This to me suggests some local market power. But so what? Retail margins are about 12% of the cost of gasoline. Limiting this market power, assuming its possible, isn’t going to help that much.
Also, the issue is by no means clear cut.
The article then goes on to apply “Judgment and economic theory”.
They make one interesting point: “Consumer search costs and locational advantages may provide market power to some retailers, but such market power
might be viewed as the costs of product differentiation under monopolistic competition.”
Translation: If selling gas at a retail level is so profitable, there will be entry into the business, which will in turn drive down these profits. As it is, the “black gold” that most US gas stations make their money on is… coffee (and other convenience store items).
Prices rise quickly and fall much more slowly (and seldom back to prior levels) because, I suggest, greed is the major factor in the equation.
How does that work exactly? I am not being flippant, but I am wondering, if there are so many competing oil companies, how do they all decide to keep prices from going down fast? If one could afford it, wouldn’t that company lower it’s prices quickly and capture a ton of the market?
Yes, I understand. My point was that when prices rise, if gas stations don’t follow suit immediately they will very shortly experience a run on their gas. When crude prices fall, the opposite does not need to happen because consumers do not have the option of going directly to the refinery and buying their gas there. The point about the inelasticity is that if demand was elastic it would force retailers to lower their gas prices faster or they’d lose customers. Since gas prices are relatively inelastic, we have to wait for the slower process of competition on the margin.
But like I said, I was just speculating.
Of course, they already got their $2.50/gallon for the old gas - the stuff they paid less than $2.50 for, but then marked up once the replacement cost rose. Now it’s our $2.50/gallon they’re after.
Ok, methinks the effect isn’t huge, but let’s chat anyway, Sam.
---- When crude prices fall, the opposite does not need to happen because consumers do not have the option of going directly to the refinery and buying their gas there.
That implies that the local Unical knows it can maintain its high prices for a while, because it won’t automatically be undercut by Exxon down the street. Similarly, for the other local gas stations. This is a story of (limited) market power.
One might argue that implicit collusion is easier in the face of falling input prices, relative to situations where prices are constant.
------ The point about the inelasticity is that if demand was elastic it would force retailers to lower their gas prices faster or they’d lose customers.
The total demand for gas in the neighborhood could be pretty inelastic, while the demand faced by a given gas station would be substantially more elastic. This would be the case in a competitive market.
Again though (and we’re arguing technicalities here), elasticity here refers to the shape of the demand curve. You really need to introduce other concepts if you want to assert asymmetric price responses. (Plausibly, it might be argued that inelastic demand at the gas pump level is necessary, though not sufficient, for asymmetry. But, again, this is assuming some degree of market power enjoyed by the gas station operator.)
Speculating is ok though: if I understand the 2nd linked paper correctly (which I skimmed but did not read), this phenomena is imperfectly understood.
Well, I hope this is not too much of a hijack, but let me throw another question into the equation here. All my years growing up and living in the States, I was used to seeing some variation in gas prices between one station and the next…not too dramatic, but say 3-10 cents on a gallon of gas. Most times (i.e., without dramatic events like energy crises), the prices was pretty stable too…They might go up or down slowly but not dramatically.
Then I moved up to Vancouver, BC and up there it was like a whole different universe. There, it seemed that the competition was completely on price so all the gas stations seemed to have the same price down to the tenth of a cent. But then, every once in a while, a station would start a competition on price and like overnight the prices would drop something like 20%! That might last for a week or two and then almost overnight, they would all jump back up to where they were before. (One time, I remember that I saw they had risen at many stations but found one station still at the lower price and bought gas there; sure enough, by the time I drove back that evening, the price was up.)
I never could understand why gas prices behaved so differently in BC than in the universe that I came from. (Some how I feel like it has to do with the idea that consumers in Vancouver for some reason didn’t differentiate between different brands of gas as much as consumers in the U.S. so it was more strictly a competition on price. But, why this was the case is still a mystery.)
Any ideas?
I suppose another possibility to explain the behavior that I observed would be some difference in antitrust laws between the U.S. and Canada…so that there was some sort of loose collusion involved in the ending of the price wars that isn’t legal in the U.S. but is allowed in Canada?