Gasoline versus Crude Oil prices

Sunday, August 15, 2004 | 06:51 AM

Question: Why is it that Gasoline Prices seem to rise so quickly, but fall so slowly?

Answer: When you see the price of Crude Oil sell for $46, that barrel of Oil won't make it to your car as gasoline for as long as 3-6 months. Recall in May, the price of oil pulled back into the hi $30s -- thats why gas dropped in price by more than a few cents in July.

There's actually a good reason for the phenomena of retail gasoline prices rising quickly, but falling so much more gradually. Its strictly a function of competition in the marketplace.

When crude prices rise, all the gas stations raise their prices accordingly -- they have no choice, otherwise they would be losing money on each sale. They all pay (more or less) the same prices for refined gas, and make a relatively small mark up on the fuel they sell. As wholesale prices rise, they pass along the increase.

When the price of Crude eases, however, what forces gasoline prices back down is simply competition. One station lowers prices a few cents, and pulls in more traffic; That forces others to do the same -- until prices gradually work their way back down to the earlier prices (assuming crude returns to its prior price). While the retailers may make a greater profit for a few days, competition eventually forces them back to their original margins.

You may be surprised to learn that gas stations make the bulk of their profits on the quickee mart / convenience store, or on automobile repairs -- and not on fuel. They are greatly incentivized to keep the prices low enough to draw you in as a customer, where they can make their profits on, well everything else beyond petroleum . . .




Resources: For additional information, see the following

WTRG Economics
(terrific resource for analysis, planning, forecast and data services for energy producers and consumers)
http://www.wtrg.com/

Prices: Crude Oil, Heating Oil, Gasoline and Natural Gas
http://www.oilnergy.com/1cashpet.htm#gaso

Gasoline Price Pass-through
by Michael Burdette and John Zyren
January 2003
http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2003/gasolinepass/gasolinepass.htm

Gasoline Price History
http://www.ghg.net/stuart/gasprice/gasprice.html

Sunday, August 15, 2004 | 06:51 AM | Permalink | Comments (24) | TrackBack (8)
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» Rising Fast But Dropping Slow from PFBLOG.com - My Personal Finance Journey
Another topic for gas price vs crude oil price (see the other one here): Did you remember that when gas price was rising in the early summer, it was moving at several cents a day, but when it has been declining in the last few weeks, one cent differenc... [Read More]

Tracked on Aug 19, 2004 3:11:22 PM

» Oil and Gas from Industry - The Joe Hill Dispatch - Journal of Business, Finance and Economics
Bloomberg:Aug. 26 (Bloomberg) -- Crude oil futures fell for a fifth session, the longest period in 10 months, as a... [Read More]

Tracked on Aug 26, 2004 12:53:11 PM

» Oil and Gas from Industry - The Joe Hill Dispatch - Journal of Business, Finance and Economics
Bloomberg:Aug. 26 (Bloomberg) -- Crude oil futures fell for a fifth session, the longest period in 10 months, as a... [Read More]

Tracked on Aug 26, 2004 1:10:32 PM

» Oil and Gas from Industry - The Joe Hill Dispatch - Journal of Business, Finance and Economics
Bloomberg:Aug. 26 (Bloomberg) -- Crude oil futures fell for a fifth session, the longest period in 10 months, as a... [Read More]

Tracked on Aug 26, 2004 1:12:06 PM

» Oil and Gas from EcoWire - The Joe Hill Dispatch journal of environmental news and activism
Bloomberg:Aug. 26 (Bloomberg) -- Crude oil futures fell for a fifth session, the longest period in 10 months, as a... [Read More]

Tracked on Aug 26, 2004 1:29:20 PM

» Oil and Gas from EcoWire - The Joe Hill Dispatch journal of environmental news and activism
Bloomberg:Aug. 26 (Bloomberg) -- Crude oil futures fell for a fifth session, the longest period in 10 months, as a... [Read More]

Tracked on Aug 26, 2004 1:31:17 PM

» Rising Fast But Dropping Slow from PFBLOG.com - My Personal Finance Journey
The dynamics of gas pricing. [Read More]

Tracked on Sep 1, 2004 1:08:10 AM

» Oil Plunge: Good for Growth, Bad for Earnings? from The Big Picture
After starting the year in a funk, Markets have rallied on Crude dropping to 19 month lows. Dropping oil prices are a double edged sword: They help consumers, especially those on the low end, who have been squeezed by higher gasoline and home heating o... [Read More]

Tracked on Jan 12, 2007 7:39:33 AM

Comments

I would have to imagine then that gas retailers must really hate those pay-at-the-pump machines

Posted by: Arch Stanton | Aug 16, 2004 10:40:53 AM

The comments to this entry are closed.



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