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Why Gasoline Follows Oil Up But Not Down
By JLP | January 18, 2007
If you’re anything like me, you have probably asked yourself this question:
“Why does the price of gasoline go up at the mere mention of an increase in the price of oil but then takes its time coming back down after the price of oil drops?”
Well, this article, Why Gasoline Follows Oil up But Not Down, I found last week tries to answer that question.
According to the article, the reason seems to be simple economics.
The service stations are still selling the same amount of gasoline when wholesale prices fall, said Kloza, “so there’s no reason to drop.”
“Human nature being what it is, [service stations] typically react [to a spike in oil prices] by pushing prices higher, even before they replace their inventories,” said Geoff Sundstrom, spokesman for the motorist organization AAA.
“And [again] human nature being what it is, unless other stations bring their prices down, he’s going to be very reluctant to bring down his.”
This seems to be typical of practically everything. I remember when the price of milk jumped $1.00 per gallon in one day. There was some excuse for the price increase but I don’t remember what it was. All I know is that nearly two years later I’m still paying that same high price. The same thing can be said about orange juice. The recent cold weather in California has caused orange juice prices to rise (they were already high to begin with). I’m not expecting them to drop anytime soon.
Topics: Budgeting |
January 18th, 2007 at 4:40 pm
It does seem to go down much slower than it goes up, but I can say it has come down quite a bit around here lately. I just filled up this afternoon for $1.94 a gallon. Cheapest I’ve seen it for a long time. Wasn’t that long ago and it was close to 2.50.
January 18th, 2007 at 7:22 pm
$1.94 were are you from? It still is $2.50 here.
January 18th, 2007 at 7:26 pm
This is what energy capital markets folks refer to a “upwards sticky” pricing. The only time they make money at the retail outlets is when oil goes up. They raise prices but the gas they are selling from the tanks was paid for at the cheaper prices. During the higher prices they get a shipment of gas at a higher price, so they are not going to lower gas price until they have used up all that expensive gas in the holding tanks. Otherwise that gas would be sold at a loss.
In a nutshell when retail stores make their profit is the time between when the price of oil goes up(and they raise the pump rate) and when they refill their tanks with that higher priced gas. For those few days they make an extra few cents a gallon.
January 18th, 2007 at 10:32 pm
Easy E, I’m in the middle of nowhere a few hours outside of chicago.
January 19th, 2007 at 12:21 pm
An interesting article in todays WSJ on oil prices at
http://online.wsj.com/article_email/SB116916946106281010-lMyQjAxMDE3NjE5OTExNjk5Wj.html
January 19th, 2007 at 2:59 pm
I wrote a post that may help expand how prices rise and fall in response to JLP’s post:
Gas prices will change - so who’s at fault?
January 22nd, 2007 at 8:44 am
[...] All Financial Matters speaks of the correlation between gas and oil prices. [...]