What Determines Gas Prices?

What determines the prices at gas stations? I mean, obviously the market price for oil has something to do with it, but how can there be a gas station charging $1.39 and another one two blocks away charging $1.45? Why is the gas price sometimes substantially different in different towns?

Well, one station may have a more convient location, causing consumers to be willing to pay a couple more cents for the added convience.

The prices are set according to that fundamental capitalistic rule: Charge all the market can bear.

Supply and demand.

There can be a million reasons. One brand can have better image. The location can be more convenient. The premises can be more desirable.

And, for all we know, maybe the cheaper guy has a better deal on supply or lease or whatever and there’s nothing the other guy can do and he is being driven out of business.

I heard on the news once that gas prices are determined by gas prices in the area. A year or so ago, gas prices in L.A. were about $1.75 for regular and the same gas in rural Washington was about $1.29. (Of course, California gets “specially formulated” gas.) Anyway, the reasoning was that gas stations in an area charge x for gas, so when prices are set they are set near to x. You could call it a “chicken and the egg” question, or you can call it “charging what the market will bear”.

Ultimately, prices are determined by supply and demand, but local variations may be tempered by all sorts of things, such as a retailer’s contracts, location, pipeline status, etc.

That’s similar to the rest of the retail world. A pair of Levi jeans costs me less at Target than it does at Foley’s (department store chain here). Before Safeway cratered here everything was priced a little bit higher than the nearby Kroger, in part, Safeway said, because their union contract stipulated wages that demanded they make more per unit.

In theory, yes. In the real world, no. It doesn’t matter if it’s eyeglasses, gas or wonder bread, anyone selling will charge as much as they can get away with.

There is no short supply on frames for eye glasses. Yet frames by a designer brand, made for $2.50 in Somewherecountry, Asia, will sell for $299 in your local store. If it was as simple as supply and demand, they’d be selling for $14.99, but they’re not.

In theory, yes. In the real world, no. It doesn’t matter if it’s eyeglasses, gas or wonder bread, anyone selling will charge as much as they can get away with.

There is no short supply on frames for eye glasses. Yet frames by a designer brand, made for $2.50 in Somewherecountry, Asia, will sell for $299 in your local store. If it was as simple as supply and demand, they’d be selling for $14.99, but they’re not.

And buyers will pay as little as they can get away with. To suggest supply and demand doesn’t set the overall price, especially for a commodity like gasoline, is absurd. **

You are confusing cost with supply and demand. They are separate things. Those designer frames are in high demand – people want to buy them because they want to look trendy. They are willing to pay a premium to buy them. Demand exceeds supply, so the price rises.

If those frames were really stupid looking or became un-trendy (say, Carrot Top was spotted wearing them), then you might not be able to sell them even for the low price it cost you to make them. Supply would exceed demand.

Production cost is irrelevant to supply and demand. It’s only a factor to the except to the extent that if you can’t sell above cost, you’ll stop making that particular item and go do something else.

I read a while ago that it had to do with the area that a place was in. The companies that sell the gas determine how much they sell it to the gas station based on what “grid” they’re in so a place right next to another place could sell it for more and still make less money.

I read this article many years ago so I could be wrong.

Um, no.

What I’m saying is that a price is generally set according to what the seller think is a reasonable rate. There is no shortage of frames for Calvin Klein eye glasses, driving prices up. By clever advertising, a high price and selling only in select stores a demand is created, but it has nothing to do with the supply.

Of course, supply can affect the price, but I’m not confusing cost with ‘supply and demand’. I’m saying that cost or supply might figure in the equation, but most of the time, the price is set without regard to those factors. Instead it’s set according to the principle: As much as we can get away with.

Absolutely absurd. The price OF COURSE is set as high as the seller wants, but if the demand does not support that kind of pricing, the price will fall, if the supplier is smart. Some aren’t.

If supply and demand aren’t factored in to begin with, they will be later, let me tell you.

Your quip about advertising and selling in select stores is irrelevant. It matters not at all (in regards to pricing) how the demand is generated, but only that it exists. Ray-Ban sunglasses had a very high demand after “Risky Business” came out. In this case, they spent very little to create the demand. Good for them. But it doesn’t matter, as long as the demand is created and you can still make a profit over your total costs.

There is a shortgage of Calvin Klein frames in that the company cannot produce a million a day, just for starters. There is a limit to the practical supply, and yes, they may be creating an artificial scarcity, which has been known to work like gangbusters for some companies. Please read the recent threads on De Beers for further examples. But to say that supply and demand doesn’t enter into the equation is to have a fundamental lack of a grasp of markets as they work in the real world. I’ve run a small business. Take my word for it.

Oh, and I just realized that you proved yourself wrong with your own statement.

Why doesn’t the supplier just charge even more than the figure they settled on? BECAUSE THE DEMAND IS NOT HIGH ENOUGH. People are not willing to pay that much for the number of copies they need of that item.

What people are willing to pay is the ONLY relevant measure of what their desire for it is. If it’s cancer treatments, they’re willing to pay quite a lot. If it’s diamonds, which are actually relatively plentiful, they’re not, except that they are, because of the perceived prestige, and the artificial scarcity, as mentioned before. The reasons for the demand don’t matter in the pricing, just the fervency of that demand.

No matter how you slice it, it comes up S&P.

Yup. What I said.
Supply doesn’t figure in it.

You treat S&D as a natural law, infallible. That is not the case and arguing that it is, is absurd. Shortage or surplus of gasoline doesn’t drive prices, as observed when the world market prices go up, gas stations quickly up the price with that as an excuse. When price go down, gas stations do not lower the price at the same speed.
Most gas stations make very little money from selling gas. The pumps bring in the cars, the sell of Pringle’s is what gives profit.

Demand is what drive prices, or, in other words, the retailer will charge whetever s/he can get away with.

The Gaspode: If you seriously believe prices are not ultimately set by supply and demand in a competitive and capitalistic system, then there’s little I can do to help you. Consider taking an Econ 101 course.

Why don’t you do it, Crafter_Man? Consider Econ 201, too.

Supply and demand is a shorthand catchphrase to describe a very complex system. We’re fighting ignorance here. I’m merely stating, and read this slowly please, that it isn’t as simple as saying that the supply will affect the price. Far more important is finding out what the public is willing to pay.

Short term changes in supply and demand can radically change inventory and prices. Refining and delivery capacity are limited compared to possible demand spikes.

This summer’s gas run in Phoenix shows what can occur. A relative modest decline in supply caused by a pipeline problem led to panic buying and a sharp price increase.

Total supply had declined but the inventory available for buying dropped much more–the supply had shifted from the gas station tanks to the vehicles, as people topped off their tanks.

You contradict yourself. You say there is “no shortage of frames,” but then note that Calvin Klein frames are only sold in select stores. If you could buy Calvins at every store that sold sunglasses – at Walmarts and Targets as well as expensive boutiques – then there would be a greater supply, and prices would fall.

But of course, this isn’t the best example to use. Luxury goods trade off their name as well as their physical characteristics; a single company can effectively control the supply of a particular luxury good because they’re the only one who can make it – only Calvin Klein can produce Calvin Klein brand sunglasses. Branding can create somewhat-artificial scarcity.

That is not the case with commodities like gasoline. There is no difference between same-grade gasoline provided at Shell versus Exxon. **

Total bullshit.

Remember the big power outage in late August in the northeast? Among other things, it shut down several refineries, which in turn reduced the short-term supply of gasoline in that part of the country. Gas shot up from $1.60 or so to $2.00 or more. I note aahala notes a similar occurence in Phoenix. And whenver you hear OPEC talking about propping up world oil prices, how do they talk about doing it? By getting their members to reduce production.

Oh my.

No, I’m not arguing against myself. Power outages and broken pipelines are not normality. The OP asked specifically why gas prices can change so much within a city, and even between stations on the same block. My original anser was: “They charge as much as the market will bear.”
This got refuted by the old: “Nope, it’s supply and demand” and then I get condescending answers by people who really don’t seem to understand how a business is run. You accuse me of contradicting myself, Dewey and then go on saying:

Well, d’oh!
At least this past quarter century, branding has been the most important way to maximize profits. Calvin Klein has no shortage of frames, and should there suddenly be more buyers on the market, lottery winners, perhaps, willing to pay $299 for a pair of glasses, CK will gladly supply them.
The price is not set according to supply. CK will gladly sell a million more glasses a year @ $299, as long as there are buyers. That’s how you maximize profit and get a return from your investment.

Take another example, seeing that you’re in New York, Dewey. You want to open a restaurant. Kinda fancy, but not really the place where people will stand in line. So we’re getting to do the menu. Now, what are you gonna charge for a bottle of Michelob? Annheuser-Busch (sp?) has no shortage of Michelob and you can get all you want and as much as you can sell. The’re gonna cost you $0.59 to buy, and you know what? The distributor will throw in some fridges, nice neon signs, and bar supplies, if you meet a certain quota.

Next door to your place is a rundown tavern, doing two-fer-one every night of the week. They charge $3 for Michelob, but you’re not competing for the same guests. However, a little down the street is a restaurant very similar to your. You check them out and see that they charge $6.50. Well, it gives you an idea, that charging $8 might not be smart, but you want to be in the neighbourhood of $6.50.

So tell me, how does the supply of Michelob bottles figure in how you set the price? There really is no shortage of beer bottles or restaurants in NY, is there?

Gaspode, “what the market will bear” is nothing more than the demand side of “supply and demand”; just because the supply is more-or-less constant does not mean that supply and demand are not setting the price.

The problem, in fact, is that the law of supply and demand is obeyed perfectly – so perfectly that saying “supply and demand” is not an answer to the OP. It’s a tautology, and an exercise in smug pedantry.

So let’s restate the OP’s question in such a way that the noise gets filtered out:

“Given a relatively constant supply of gasoline, what factors determine the demand for gasoline, and thereby the price? Given a relatively constant demand, how do small changes in petroleum supply/price inspire large changes in at-the-pump gasoline prices?”