Michael Giberson
Retail gasoline prices typically rise like a rocket and fall like a feather (as discussed here before), but this most recent price rise and fall may be upsetting that typical pattern. Just eyeball the chart below from the U.S. Energy Information Administration and you see that prices appear to be dropping about as fast as they rose. (But don’t be surprised if Labor Day travel and hurricane-related disruptions insert a small pause into the downward fall.)
The “rockets and feathers” price pattern is primarily due to consumer shopping behavior – when prices are going up, consumers shop around more and keep pressure on the retail price; when prices are going down, consumers tend to do less price comparison which naturally eases pressure on retail prices. I would speculate that because gasoline prices reached such high levels (oil prices, too), that gasoline prices remained constantly on the mind of consumers and that continuing salience helped consumers to continue price comparison even as prices began to fall.
That is to say, consumers are not thinking, “Wow, gasoline for only $3.65 a gallon when it was $3.90 last time I filled up.” Instead they are thinking more along the lines of, “Wow, gasoline is still relatively expensive at $3.65 — maybe I can get a better price down the street.”
This story by Tiffany Woo in the Eufaula Tribune (Alabama) draws the link between consumer shopping and pressure on retail gasoline prices:
[Alabama AAA representative Clay Ingram] says price shopping is another way consumers have helped lower the cost of fuel. “For the past 70 years, there’s been a mentality where people would instinctively look for the lowest price per gallon,” said Ingram. “If two stores were side by side and one was 98 cents per gallon and the other was 99 cents per gallon, everyone would instinctively go to the station with 98 cent per gallon gas. It’s how our parents did it, and that’s how we learned to do it.”
Price shopping causes competition between gas companies, and, equally as important, it creates competition between gas stations. This forces suppliers to charge the lowest possible price for fuel.
Note, however, that gasoline price are not dropping quite as fast as oil prices, suggesting that retailers (and/or refiners) are getting at least a small piece of the traditionally larger margins that accompany falling gasoline prices.
Dealers, particularly, may have underestimated next tanker prices on the way up and need to recover some of the margin lost as a result. They may also be anticipating and preparing for another upward turn. Independent dealers lack the financial resources to go “out of pocket” on the way up.
No need to speculate. Refiners were losing money at the peak of gasoline prices. Now that prices are falling a bit, they’re making money again.
Just look at the statements by Vallero. Being a pure refiner, their profit/ loss statements should be a good gauge of where all the refiners are.
Someone at work told me Friday that the reason for the drop in oil prices was that the election is coming up. When I asked what this meant, he said that there were more oil lobbyists in Washington than ever before. When I pointed out that Washington had been in the oil business for at least 100 years, and the ties between Gore and Occidental, he said, “yes, but they are getting a better reception now.” Amazing: intelligent people still think that prices are set by agreement between a few people in smoke-filled rooms
I’m glad to see someone is still interested in the supply and demand thingies.
Someone at work told me Friday that the reason for the drop in oil prices was that the election is coming up. When I asked what this meant, he said that there were more oil lobbyists in Washington than ever before. When I pointed out that Washington had been in the oil business for at least 100 years, and the ties between Gore and Occidental, he said, “yes, but they are getting a better reception now.” Amazing: intelligent people still think that prices are set by agreement between a few people in smoke-filled rooms
I’m glad to see someone is still interested in the supply and demand thingies.
Eric, my buddy, who works for BP, is in an MBA program at Notre Dame, and he says that all his project-mates think that BP sets oil prices.
If business students don’t understand supply and demand…