Why gas prices are falling more slowly than they rose
1 comment October 9th, 2008
With another drop today, oil is down almost 40 percent from its high in July. Gas prices are only down about 20 percent from that time. Ah-ha, say the Gouging Police, proof that they’re overcharging me at the pump. But you have to take a longer view to get a true picture of what’s going on.
As I’ve said all along, gas prices never went up as fast as oil prices did in this run up.
Since October, 2006, oil has risen 62 percent (including today’s decline). Gas prices have risen about 55 percent in that time. That’s the closest those two numbers have been since summer, 2007.
At the worst mark, this July, oil had risen 150 percent while gas had only risen 80 percent. Retailers, refiners and others in the gasoline supply chain saw their profit margins decrease as the cost of their raw materials skyrocketed. So, basically they’re making that money back on the downward slope. On average over the course of this energy price craze, they’re making a profit in line with history.
What they *could* have done is raise gas prices at the same rate as oil ($5.75 a gallon in July, anyone?). But they didn’t, partly because that would have looked much worse … but mainly because it would have absolutely killed demand and cause everyone in the supply chain to really lose money. Instead, they ratcheted up prices as much as they felt they could, hoping to eventually see prices slide and profits get restored.
Economists have an interesting term for this - rockets and feather. Retailers know they can only raises prices so much on the upswing, because customers are hypersensitive and will go to a different site to save a penny or two. So they have to be more conservative. But when prices are on the downswing, they have more leeway because shoppers are less vigilant.
Again, on balance they’re coming out as much ahead as they would in more “normal” times - that is, a decent profit like what any other capitalist venture reasonably stands to make. Perhaps they’re making more now, but they sure were taking the hit back this summer.
(I know, I know, I’ve oversimplified the business model here … there’s a lot more that goes into pricing than simply “what oil costs.” But oil has been the driving force, and watching oil prices in the past two years more than justifies gas prices.)
One other note - we in Rockford are still feeling the remnants of Hurricane Ike.Marathon spokesman Robert Calmus told me today the company has limited sales of gasoline to retailers at its Rockford terminal - those with contracts get 100 of their normal volume, but anyone looking to buy gasoline on the spot market has to go elsewhere. Also, I imagine, anyone who has a particularly busy day and needs more than their normal volume has to go elsewhere. When you have to get gasoline from farther away, transportation makes the cost go up.
The measures are due to problems on a major pipeline that serves this area. Until that’s resolved, we in northern Illinois won’t see as much savings as we might otherwise. (Peoria, which is seeing gas dropping below $3 in spots, gets its gas from barges up and down the Mississippi River. Stations in Wisconsin get their gas from Madison and other places. We’re just lucky, I guess.)
