What Determines Gas Prices?

Factual Questions
21

Huh? So supply is not a factor in supply and demand?

:looks around: Am I talking to myself? Is my writing skill in English so under par?

What have I said all the time? That supply is not a factor that is that important, except in special cases with acute shortage or surplus. The seller of whatever product or service we’re talking about will charge as much is possible, regardless of the supply.
The old S&D dictates that price will go down, when supply goes up. So why are cans of Miller Lite not going for a nickel each? There’s no shortage, surely.

22

Gaspode, I think there’s a terminology gap here, not a disagreement on the underlying principles. You object to the explanation “supply and demand,” then go on to state your reasons for prices, which sounds to me like you’re just going into the details of supply and demand. That’s why a few people have stated that you’re contradicting yourself.

I see you’re in Sweden, so there might be a simple language issue. Just now re-reading your posts carefully, it seems that you might be interpreting the phrase to mean that supply is the key component of demand. What’s meant is that there is a complex interplay of the supply of an item and the demand for it, and this system is what sets the prices.

23

Greed.

24

You conveniently exclude the first sentence of my paragraph, where I wrote “But of course, this [luxury goods] isn’t the best example to use.” I was drawing a distinction between heavily branded items like designer sunglasses and commodity items like gasoline. Because only CK can make CK sunglasses, they effectively control the supply of CK sunglasses; their successful marketing has led to other brands being seen as insufficient substituted goods. This is a far cry from the market for commodities, where no one company can (absent forming a cartel) control the output of an item. **

Well, duh. Supply curves slope upwards; as price increases, more firms are willing to supply a given good. The contraint on that is demand. If a whole bunch of people decide $299 is just too goddamned much to pay for a pair of sunglasses – i.e., enough people to materially dent CK’s expected sales – then CK will lower their price. The alternative is to sit on a warehouse full of unsaleable sunglasses. And next year they won’t make quite so many sunglasses. **

Again: if demand slips such that CK isn’t selling the sunglasses it’s made, it will reduce its price. And make fewer sunglasses next year. **

It’s an oversimplification. I’m not just charging for Michelob. I’m also charging for a service, namely the provision of a certain kind of atmosphere in which to drink Michelob (actually, in a genuine chi-chi Manhattan pub, I’m probably not serving Michelob, but rather some obscure expensive microbrew, but Michelob is fine for example purposes). The price of that service isn’t segregated from the price of the beer on the customer’s bill, but it’s there nonetheless.

25

I omitted the sentence, as I qouted only to remind other readers what I was refering too. It’s not as if I’m trying to misquote you or obscure the matter.

And no, the price will not drop. CK will pull back the unsold models, destroy them and try to figure out how to make a better model next year, which will sell better. And next summer, they’ll be $319.

As for the tavern in New York, again, there are a lot of factors, as I’m stating. The supply of Michelob (which might not be the beer of choice, but you’ll have it there) is not weighed in when you set the pricetag. Now if you have a premium imported beer, not available in the rest of NY (unlikely), which is high in demand, sure, you can sell it at an astronomical price. But the OP asked about gas, which is readily available from a number of outlets, all over the place.

All I’m trying to do here is to say that an answer like “supply and demand” as a cover all phrase certainly lacks quite a lot when it comes to explaining why we pay what we do. Most of the time, it’s actually reversed - it’s the supply of customers that set the price. Some of the richest people in the world got rich by selling things that, to the public, costs almost nothing or close to it. Enzo Ferrari got kinda rich, but nowhere in the same league. And still there is an (artificial) shortage of Ferraris.

26

“They charge as much as the market will bear.”
“Nope, it’s supply and demand”

Aren’t these two ways of saying the same thing? I guess entry into the market needs to be taken into account.

For instance, I think on luxury goods, where the trademark and patents often come into play, we’re talking about a monopoly market, where suppliers only produce what will give them the demand and price they desire. After all, since ck lenses are so cheap to make, it’s only the trade name and maybe some design issues that keeps them in the high-end business. They will not sell these niche goods down to the normal market equilibrium price (where the demand curve hits the cost of producing one more unit). No?

27

Gaspode, I know you’re not this thick. The “supply of customers” IS DEMAND. Once more:

Supply is always a factor in pricing, but it is not always a significant factor. Do you see? Supply and demand are the two factors that determine price, but if supply remains constant, then demand is responsible for all price changes. Consequently, we do not always talk about supply – but it’s still there. If supply is very, very large, then it contributes almost nothing to the price, but it’s still there. No one ever said that large supplies can lower prices infinitely (or Anheuser-Busch would pay people to drink Budweiser); we’re only saying that sudden contrictions in supply can raise the price – which is why Coors used to be worth smuggling into Georgia (I know, it’s just a movie – work with me here).

Thus reducing supply

Yes, because of increased demand. However, CK will probably also restrict their production to account for reduced sales estimates.

This conversation is like discussing air travel with someone who’s obsessed with height-above ground:

“Ground elevation isn’t important; it’s height above ground that matters.”

“Yes, but height above ground is the altitude above sea level minus the ground elevation”

“Elevation schmelevation-- I don’t care if you’re flying over Death Valley or Denver, if H-above-G hits zero, you’re crashing.”

“Yes, but my plane’s altimeter only reads altitude above sea level, so I need to know the ground elevation.”

“Hello?! Am I not speaking English? Only height above ground matters!”

In the above dialogue, sea level might represent the cost of production - a fixed amount, not affected by supply or demand (hypothetical product with no economy of scale). The ground elevation is like supply – an amount above sea level that will positively affect the safe cruising altitude. H-above-G is like demand – it’s the larger component of altitude, and it’s the thing that you spend most of your time trying to control. Altitude is like the actual retail price: it’s the measurable quantity, the sum of supply, demand, and cost. Not a perfect analogy, but then, what is?

28

But of course the supply strongly influences what it’s possible to charge (assuming you actually want to sell anything).

The CK Sunglasses example is rather different from the OP example. With simple supply and demand, there is the assumption that the supply is available to multiple, independent resellers. If you and other sunglass retailers are getting CK sunglasses for $19 per, don’t expect to move many at $299 - your competiitor down the street whose price is $49 will scoop all your business. But if there is only one seller (CK and its “authorised” retailers, who sign agreements not to undercut the CK price), then there is no competition and the fact that CK can get vast quantities of sunglasses at $19 does not prevent them from charging (and getting) $299.

With gasoline, the market is much more free. Retailers can order from any supplier whose terms they like. They then sell for what the maket will bear, but the price down the street has a lot to do with that. And, given reasonably steady demand, the curent supply has a lot to do with the price down the street.

For the true effect of supply on the price of CK Sunglasses, consider what happens when the 747 carrying this month’s supply from China happens to crash into the factory, which burns to the ground. No new sunglasses will be available for 6 months. They are still hot, and customers soon find that many retailers are out of stock. They start selling for $400 - $500 on eBay. Retailers that have a few left will be likely to boost their price.

Or suppose that some ripoff outfit starts making a copy that’s real hard to tell from the original. Through unauthorized channels, they sell like hotcackes for $29. Those who paid $299 start seeing the exact same model on everyone they meet. The new Porsche Design model ($319 a copy) doesn’t seem to have this problem, so all the cognoscenti start wearing that. CK had better figure out how to suppress the supply of ripoffs in a hurry or kiss their $299 selling price goodbye.

29

You keep saying that the supply of Michelob is not relevant, because “there’s no shortage of beer bottles”, etc.

There is inherently a shortage of anything that takes any kind of trouble to get. There may be a concentration of the item locally, but if it takes trouble to make or get it, then there is some kind of a shortage. You have to pay people to go to the trouble.

Let’s put it this way: if nothing else, there is a shortage of people willing to serve you. Realize that this is true the entire way back in the manufacture of the item, which in one sense never stops, because you have design the machines to mine the iron to build the factory to make the bottles to fill with beer, made with hops, which had to be farmed with expensive machines…

Anthing that isn’t as abundant as air or sometimes dirt, will have some sense of a shortage. You’re paying for people to go to the trouble to make things for you and get them to you.

30

I haven’t heard a single person mention subsidies. We’re not talking about a free market here, people.

31

Gas companies don’t price their product at the price they got their last shipment - that is a sunk cost. They price it to the next shipment.

I suggest your idea that prices do not fall as quickly as they rise is an unsupported declaration.

32

Consumer demand for gas seems to be pretty insensitive to price in the short run.

If there’s a sudden spike in prices, a lot of bellyacheing but not a proportional drop in purchases. Drivers seemly reach a little deeper into the their pockets and cut back elsewhere to pay the bill.

And a sudden decline in price doesn’t increase the amount demanded that much either. Customers mostly spend the savings on something else.

What changes the short term demand is mostly the weather, vacation season and panic buying. If price was all that important, a lot fewer people would be driving SUVs.

33

To get somewhere near to the original post, if the price of ANY commodity (Paper, Beef, Aluminum, etc) was plastered along nearly every block on busy roads, you would notice some anomolies.

As has been mentioned in other posts, there are many inputs into the price of gasoline, these include:
The commodity price - West Texas Intermediate price is pretty much the same for everyone in the States.
Refining costs, which can vary by region
Federal, State, and local taxes - These should be the same on a per-city basis at least.
Potentially, rent for the land the station is on
Salaries at the gas station (probably pretty insignificant)
Amount of profit the owner requires

This final one (on this list) is probably the biggest reason for inter-city differences in price. Some stations feel that a lower price will result in smaller per fill-up profits, but more fill-ups. Others feel that they are happy with less fill-ups, but higher profits per fill-up.

Also, location plays a significant role, as remote stations have a quasi-monopoly on local purchasers and can likely charge more, while stations with several close competitors have to be more vigilant on pricing in order to maintain business.

Hope this helps

34

Gasoline in America isn’t subsidized, but rather taxed to the tune of about 15% of the current prices, in some cities.

Subsidies increase the supply by making it possible for the producer to make more, or at least they reduce the consumer’s cost, because part of the real cost of manufacture has been paid by the government. Of course, that’s overlooking the fact that a government only has money by taking it from the people. Ask yourself, “Would I personally spend money to support this cause?” If not, voice your opinion to your government that you don’t appreciate being forced to contribute to a pot that is given to that activity.