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Gas Returns to Pre-Katrina Levels

Last Summer, we looked at the question why Gasoline prices shoot up so quickly, but take much longer to drop.

As the chart nearby shows, Gasoline futures have fallen to the pre-Hurricane Katrina levels. Oil is back to early August levels. Yet many local stations are still charging post-Katrina prices. My local gas station (BP Amoco) still is charging $3.49 for Premium. Although the summer driving season is now over, the process by which prices at the pump come down is simply local competition.

Indirectly, part of the explanation for this is your fault: consumer behavior is why gas prices are lofty. Studies show many people (irrationally from an economic standpoint) go to the same gas station, simply out of habit; I am as guilty as everyone else of this.

If you want to see prices drop more quickly, you as a consumer of Gasoline should go to the station with the cheapest gas. Doing so will impact ALL  LOCAL PRICES.

Why? Station owners are typically local business people (franchisees) who carefully track how much fuel they sell. Under normal circumstances, they only make a small markup on Gas -- everything else they sell typically has a higher profit margin.

Remember these three components to basic economic theory:

Consumers are rational;
Price incentives affect behavior;
Competition lowers prices.   

In theory, by shopping around you not only get cheaper gas, but you help bring down the average cost for gas in your local neighborhood. When your station sees their unit sales decline, they will lower prices to attract more consumers.

If you want some suggestions as to where the cheapest gasoline in your neighborhood is, I suggest any of these sites:

• GasPriceWatch.com
• GasBuddy.com
• FuelEconomy.com
• FuelMeUp.com

Of course, demand isn't the whole equation -- there is still the supply shock -- and that remains problematic. The WSJ notes "Oil production in the Gulf of Mexico showed marginal improvement during the weekend, with about 57.4% of daily output remaining offline, down from 59.8% of the daily total Friday, according to the U.S. Minerals Management Service."

I'm sure we will be hearing more on this . . .

UPDATE: September 15, 2005 6:22pm

Prof James Hamilton notes that overall Gasoline Demand has fallen off a cliff:

Whether this is a function of consumer demand slackening, or reduced supply is unknown at the moment.

Source:
Petroleum Hits Pre-Katrina Levels
Nymex Crude and Products Fall on Worries High Prices Have Been Eroding Demand
Leah McGrath Goodman
DOW JONES NEWSWIRES, September 13, 2005; Page C6
http://online.wsj.com/article/0,,SB112652363765137892,00.html

Thursday, September 15, 2005 | 05:01 PM | Permalink | Comments (5) | TrackBack (3)
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Comments

There are at least two possibilities for year 2005 decrease in gasoline consumption:

1) people were easily able to curtail gasoline (eg, carpool on way to work) yet still achieve the same level of economic activity (go to work, take vacations, visit family, etc)

2) people cut-back on economic activity to conserve gas. This could have ripple effects that slow down the economy: fewer vacations, no road trips, no rv or boating, less driving to restaurants, etc.

I am not sure if it is 1 or 2

Posted by: nate | Sep 15, 2005 10:33:19 PM