I don’t want this to turn in to a FLAME. I really do want to know if there is an economic basis for what happens at the pumps. When the price of oil goes up it seems that the price of gasoline goes up at clost to the same time but when oil prices drop it takes so much longer for gas prices at the pumps to drop is there a reason for this other than “big oil companies ripping off the little guy”. Are there real economics that drive this disparity?
There are only two things that are infinite…the Universe and Man’s stupidity…I’m not sure about the Universe though.
When prices are low, oil companies keep excess inventory on hand. If the price of crude goes up and they raise their prices, they get a nice excess profit on the oil that was bought at lower prices.
When prices are high, oil companies keep as little excess inventory as possible. That way if prices drop, they are not stuck with a lot of high priced oil. When the prices drop the oil companies will increase their purchases. The problem is it typically takes 4-6 weeks for the new lower priced oil to reach the refineries from it’s sources in the Middle East, Norway & S. America. Then the oil has to be refined, if supplies are really low the refineries will need to significantly increase output which will cause higher labor prices, thus delaying a price decrease for the consumer.
With the current situation, even if prices drop today it will take several months for it to show at the pumps because inventories are so low. Today’s Wall Street Journal hints that there may even be summer shortages in the northeast and California.
Another factor is that, when the price of a gallon goes up $0.20, the distributor is at first selling you gasoline at a high price relative to what he paid for it, but that is primarily because he is going to have to replace the current supply at a significantly higher price as well.
Actually, some studies indicate that prices drop faster than thought. USA Today noted about ten days ago (I can’t find the paper, damn efficient recycling) a study that showed historically prices pretty much go up and down in direct relation to and without much time delay from changes in spot prices.
Currently, in NW Ohio, I can buy 87 Octane for $1.29, 89 Octane for $1.39. This is not too much over the price I paid before prices spiked.
Now, having lived in California, I can attest that California gas prices bear a unique relationship to oil prices, mostly because Californios insist on driving everywhere. Still, I think scaring people with the thought of shortages is a bit much.
In the late 1980’s, the OPEC countries cut their production causing gas prices to increase quickly. Our esteemed congressmen actually had hearings about why gas prices at the pump increased quicker than the higher-priced oil could be refined and delivered. The implication was that the oil companies were ripping people off.
My thought at the time was that anyone who didn’t understand simple supply and demand didn’t belong in a position where they can affect our economy. If the peanut crop suffered a devastating loss, the price of peanuts would rise. There would suddenly be an increased demand for the peanut butter on the shelf as people try to stock up, so the price will go up. This is as it should be.
As for why the price doesn’t drop as quickly with increased supply, I’m not sure that it does, but everybody, even the big oil companies, is subject to the market law of supply and demand.
I would love to get gasoline for $1.25 a gallon. Here in Canada in some places people are paying $0.75 /litre (about 4 litres to a US gallon you do the math) bu they gave and interesting breakdown the price of crude oil accounts for about 1/3 of the price, taxes about 1/2 the price is it the same in other countries?? If you want to check out the article go to: http://cbc.ca/news/indepth/gaspains/index.html
There are only two things that are infinite…the Universe and Man’s stupidity…I’m not sure about the Universe though.
Further to previous posting: In Canada here is the breakdown:
The costs behind $1 of regular unleaded gas According to independent publication FuelFax as of Feb. 2000
40.1 cents - The cost of crude oil;
37.8 cents - Tax. In Ontario, it breaks down to about half federal excise tax
(15.3 cents), and the rest provincial tax (22.5 cents);
6.4 cents - GST; ( 7% on all Goods and Services)
5.4 cents - The refining margin, covering operating costs plus profit;
10.3 cents - Marketing and distribution costs plus profit.
There are only two things that are infinite…the Universe and Man’s stupidity…I’m not sure about the Universe though.
I have noticed that gas prices have slipped about 2 cents per gallon, in NYC.
Dealers are quicker to hike the price when their distributors raise their fee. They tend to hold the higher prices as long as possible. Call it price gouging or greed! Supply and demand can be delayed a little because of passive collusion amongst the gas station owners. Just my opinion.
$1.20 a gallon ? you guys in the US don’t know how lucky you are. Over here in England 80% of the money you pay goes in tax. A typical gallon of petrol will cost you about £3.80 - that’s about seven dollars. I ride a bike.