Rising Fast But Dropping Slow

Contributed by mm | August 19, 2004 12:09 PM PST

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 difference can take days or even a week?

Barry L. Ritholtz offers some perspective in his thoughtful blog The Big Picture:

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.

I found this theory to be pretty convincing. If this is the case, and if the general supply and demand works, I can smell that gas price will be an interesting election topic by October and November.

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Comments

>>> Mike Morrow Commented on May 25, 2005

Trouble is, this poster forgets something. The price of oil quoted today won't affect the price of produced gasoline for 3 to 6 months. The trouble is, and the idea neglected by this poster is that the price of gasoline goes up THE DAY the price of oil goes up. This is gas cracked from oil at the older, lower price. Why would this older, cheaper oil command a higher price? Why would oil futures prices affect the price on the pump TOMORROW MORINING??? That's the real question that all the glossers try to paint right over and make us forget.

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