I have a cursory knowlege of OPEC, crude oil prices per barrel, local competition, and political factors involved in selling gas. I would like to know, what keeps the people that control oil prices and/or/ gas prices in check? Demand for gas seems to be constant, and supply seems to be (relatively) endless. Are the people at the mercy of oil producing nations and companies, or is there an advocate for us?
Who do you think are the people that control oil and/or gas prices? I’m in the business, and I don’t think there’s anybody that controls the price.
OPEC certainly tries to influence the price, but they hardly control it. And they’ve demonstrated that they can’t control it.
Is the price random? Of course not, someone evaluates the market value of crude oil. If you’re in the business, surely you’ve heard of stock issues and price setting issues.
As I stated in the OP, I have but a cursory knowledge of this industry. I fail to see how you can’t understand that prices of gas don’t just “happen” they are decided upon.
Are prices computer controlled? You said “Who do you think are the people that control oil and/or gas prices? I’m in the business, and I don’t think there’s anybody that controls the price.”
Okay, if it’s not a person or people…what then? You’re in the industry so you should know right?
I’m looking for answers, not questions.
I would like to know the answer to this also. Here in Alaska, we pay some of the highest gas prices in the country. Yet, we have a refinery that makes the stuff only 10 miles from my house! Why is the same brand of gas $1.79 here, but only $1.57 in Anchorage, 150 miles away?
OPEC controls a minority of total production globally. They do not control price, they can – in the form of SA as swing producer – influence price on the margins.
If you have but a cursory knowledge, then perhaps you should rephrase the question to inquire about the structure of the oil markets. They are well studied.
It is not. Short term it is relatively price inelastic, that is short term demand depends on things other than price more than price alone, however one does see demand shifts in reaction to price, so there is some price elasticity.
It is not, although this depends on whether we’re speaking to long term or short term.
First, there is time to refinery from production - i.e. shipping delays.
Second, there are market barriers in terms of refineries tooled to a certain grade/composition of crude which can induce short term price fluctuations.
Third, there are various non-market influences such as regulatory controls which influence how much supply may be able to get to market at a given point.
Insofar as producers have to guess several months ahead what demand will be and insofar as it can take months for production to get to market, there are time lags and clear information issues in terms of matching supply and demand. Further to that, there are issues in re refining capacity, as well as potentially retial distribution.
I would say “the people” are at the mercy of economic illiteracy and their attachment to under-priced oil and over-sized tanks as personal vehicles.
As for the question of Alaska, I would presume that given Alaskan costs are in general high, based on need to import over a long distance basic comodities etc. that this works into the cost structure of any retial petrol station, which is obviously part of the cost structure of the end user as well. Land price, other operating inputs. Same reason gas is an order of magnitude more expensive in Manhattan versus the suburbs.
Competition. OPEC isn’t the only game in town anymore. If they were, they could pull the same shenanigans they did in the early 70’s and super-inflate prices or just embargo whomever they wanted. But now they have competition. Whenever they want to raise prices (i.e., limit production which causes the market to pay more, hence higher prices), they have to go begging countries like Russia and Mexico to limit their production, too. If OPEC were to cut their production or double their prices, they’d be shooting themselves in the foot, because non-OPEC nations would be very happy to fill in the gap. Also don’t forget that the US’s oil production isn’t too small, either.
What sets gas prices on a day to day basis, though, is a damn good question. I have no idea, but I know everyone will be chiming in with “supply and demand.” I could conjecture that years of experience let the gasoline companies know what a demand will be a particular day and thus set the price accordingly. Hence the $0.10 price hike per gallon on Thursday nights around here (comes back down Monday mornin typically). That’s the day to day swings. As for the general trends (“gas is average $0.15/gallon over 12 months ago”) it comes to supply limitations and competition again.
Correct, over all, however for any given short term move, OPEC does have power insofar as OPEC nations, largely have the most shut in capacity, that is the greatest ability to increase production. Insofar as the Middle East (not synon with OPEC by the way, some MENA producers are not OPEC, several OPEC members are not MENA) has in general also the lowest extraction costs, they also have the most leeway - on a business basis - to increase or decrease production.
However, OPEC largely learned the lesson in the 1980s that they can not move prices above an equilibruim level for very long before (i) conservation pressures kick in (i.e. price elasticity is greater of the longer term) and (ii) other areas are developed for production.
So, while OPEC has pricing leverage, as you say, it is largely in conjuction with non OPEC producers, and their ability to influence prices at the macro level is indirect and sloppy.
Pricing is probably a function of past demand pattern prediction, as you say, combined with knowledge of current stocks and need to cover predicted inputs, both oil and non-oil costs in the business. Anticipated increases in any of the inputs or costs will lead to upwards pricing pressure. Decreases, of course a business will try to pocket them if possible, just the nature of business. Competition should drive down pricing. There are several micro-economic models for this behaviour. Of course retial gas markets are not perfectly competitive, probably restricted ogilopolies in general, so there is probably some degree of pricing coordination.
I don’t think I’ve ever seen such a combination of (admitted) ignorance and arrogance in the same sentence. Ringo, who apparently has some expertise in the area, took a shot at answering your question, then you insultingly tell him he’s wrong. So at the risk of being insulted myself, I’ll take a shot.
Gas station owners set gasoline prices. If they see the guy down the street selling it for cheaper, and it’s cutting into their business, they’ll lower their prices enough to increase how much they sell. That’s the simple answer.
But as Ringo and Collounsbury have explained, there are factors that underlie how much the station must charge to make a profit. One is that gas demand is fairly inelastic - people don’t reduce their use very much when the price goes up. So if there is a shortage in a particular market, the gas price has to go way up in order to reduce the demand just a little. Why can’t they just bring in more gas from other areas? Because each area has laws about the composition of the gas that’s sold. For example, the midwest mandates a certain amount of ethanol. Refineries are set up to produce a certain kind of gas, and it’s not feasable to just start making a different kind, so they can’t take up the slack. This is what was behind last year’s spike in gas prices in the midwest.
If you think that gas prices are set by some cabal, you’re wrong.
So why isn’t it uniformly high across the state? Why would gas in Anchorage be $.20 less than in Kenai, which is 150 miles closer to where the gas is made? We have a good variety of gas stations; why don’t the same market forces that lower prices in Anchorage do the same here? It’s certainly not land prices; land is cheaper here than in Anchorage. Seems to me there is more at work here than just supply and demand.
Is that really true? I know that I’ve read that gas station owners don’t own the gas in the storage tanks until it reaches the pump, and that the price changes daily to the owner. I imagine, therefore, two scenarios: (1) an owner could lower the price all he wants even if he loses on the gas, or (2) the provider dictates a price to the owner. I’d always just assumed it was the latter, and that much of the real profit came from extraordinarily overpriced stuff inside the mini-mart. If it were the former, I’d imagine there’d not be a whole lot of science to the pricing like I alluded to earlier.
Just nitpicking, but do you really claim gas costs $13-$20/gallon in Manhattan?
Market forces don’t necessarily act evenly everywhere. It’s fairly common to see to gas stations of the same major company within a couple of miles of each other have very different prices. One example that comes to mind is a pair of stations owned by the same franchise and identical in every respect except one is on a fairly major thoroughfare in a low-end neighborhood and the other is about ten blocks up the hill in a high-end residential area. Their prices often differ by as much as $0.50/gallon. The higher-priced station undoubtably has higher location costs and may have higher delivery costs because it is situated on a narrow winding street. It also probably has less frequent business because of its location so it may be forced to make more per transaction. However, I believe the main difference is that the higher-priced station charges what the market will bear. If people in the high-end neighborhood want the convenience of going to that station, they will pay a premium for it.
The location of a refinery may not be relevant in discussing delivery costs. Does the refinery in Kenai distribute directly to the retailers? In many cases, the product of the refinery goes to distribution centers and is then trucked to individidual outlets, so the gasoline may be going a long distance from the refinery and then coming back to the gas stations near the refinery, which means their proximity to the refinery is meaningless.
Regarding the OP, the advocate for the consumer is the consumer. Producers and distributors are setting the prices to maximize profit. If they charge too much, consumers will reduce demand. If they charge too little, demand may go up but their margin is too thin to profit. As long as there is competition between producers and distributors, the consumer doesn’t need an explicit advocate to try to force prices down. Of course, in the US gas prices are a political issue so the consumer does have an advocate of sorts in the fact that the federal government manipulates the price somewhat.
I think the reason that the gas would cost more in Kenai versus Anchorage I think the reason would be less competition. If the nearest competitor is 5 miles away you can charge more than Since the gas would be brought by tanker truck the 150 miles difference in proximity to the refinery wold make almost no difference. Also presumably the station in Kenai would be much less volume so it would have to have larger margins on gas to amortize its other expenses over fewer gallons.
My guess about the OP is that there is a formula for each franchise to set its price. Something like wholesale cost + transportation +additives+ taxes + payments on mortgage + labor +margin. The fluctuations are probably caused by fluctuation in the wholesale cost or supply chain disruptions since the other costs are pretty fixed. Differences in stations probably reflect cost of land. Stations with little competition are probably able to add a few cents a gallon to the margin which is generally very small on regular.
Fear Itself: How many people frequent your local gas station? If you live in a small enough town, you end up paying more for gas (and groceries, and clothes, and …) because the store owner has to cover fixed operating costs (like, say, power, maintainence, etc.) with a very small customer base. Stores in a more populated area can charge lower prices because they sell in much higher volume.