Why gas prices aren’t falling while oil does

January 16th, 2009 at 11:49am Thomas V. Bona

Two good explainers on this:

• From Marketplace Morning Report: It’s the refiners, who saw lousy margins in the single digits during the second half of 2008 and have only recently gotten it back to the more typical 40 cents per gallon. They’re making u As the article notes, one refiner even filed for bankruptcy protection last week. Economist Philip Verleger tells Marketplace:

“It’s essential that the people who make the petroleum products earn a rate of return on their capital. Otherwise, they’re going to go bankrupt and they’re going to close.”

•  From the Associated Press: Both the refiners and gas stations face a delicate balancing act - keep prices high enough to make money, but low enough to remain competitive.

Quinn Cassidy, an independent gasoline retailer in Slidell, La., said his profit margin on a gallon of gasoline has improved significantly since the summer, when he and others sometimes made pennies per gallon. Now, because of crude’s descent, he says he can make 25 cents to 30 cents a gallon — and he makes no apologies for trying to keep the price as high as possible while remaining competitive.

“Why isn’t it OK for me to make money?” Cassidy said.

It’s easier to make money when prices are coming down (conversely, it’s harder to make money - and easier to lose it - when prices go up). Analysts call it the “rocket and feather”, and some people think that’s some evil plan by the oil industry to gouge. But, to the extent it exists, it’s because they’ll balancing lower profits when crude soars with higher profits when it falls … the average being a reasonable “hey let’s stay in business” level.

Both these articles underscore how complicated a process energy pricing is. It’s not simply, “Oil goes up, gas goes up the same percentage; oil goes down, gas goes down the same percentage.” There are lots of steps, lots of moving parts, and no easy answers. I know that’s what frustrates readers the most - it’s hard ot understand why prices do what they do, and it seems unpredictable and capricious. Also, unlike other consumer goods, the price is in big signs out on the street.

I find the quote from Consumer Watchdog research durector Judy Dugan interesting:

“The refinery cutbacks are for purely financial reasons,” she said. “Now is the time for government to insert sharper oversight and regulatory controls of the refining industry.”

Funny how it wasn’t time to do that when the refiners were losing money (Check out the negative number in November here. Should the government also take steps to provide minimum returns for refiners? It seems like everyone is for the free market until it hurts them…

Entry Filed under: Fuel price musings