more on Prices Fuel a Rebellion / Drivers Tired of Paying More for Premium Gasoline Switch to Regular

[David Farber <dave () farber net>]

Begin forwarded message:

From: Barry Ritholtz <ritholtz () optonline net>
Date: August 7, 2005 11:46:08 PM EDT
To: dave () farber net
Subject: Re: [IP] more on Prices Fuel a Rebellion / Drivers Tired of  
Paying More for Premium Gasoline Switch to Regular



On Aug 7, 2005, at 9:32 PM, David Farber wrote:

> Has everyone else noticed that -- when unrefined/raw crude oil  
> barrel- prices increase, there is a near-INSTANT increase in retail  
> pump- prices for the finished, refined product ... but when crude-oil
> barrel-prices decrease ... gee gollie gosh ... it seems to take WEEKS
> for the retail prices to similarly subside.
>
> That's called "free enterprise" and "marketplace competition" ...
> cartel-style!



Hey Dave,

I addressed that very issue about Gasoline versus Crude Oil prices a  
exactly one year ago; Perhaps the IPers might be interested


Gasoline versus Crude Oil prices
http://bigpicture.typepad.com/comments/2004/08/gasoline_versus.html


Question: Why is it that Gasoline Prices seem to rise so quickly, but  
fall so slowly?

Answer:  When you see the price of Crude Oil sell for $46, that  
barrel of Oil won't make it to your car as gasoline for as long as  
3-6 months. Recall in May, the price of oil pulled back into the hi  
$30s -- thats why gas dropped in price by more than a few cents in July.

There's actually a good reason for the phenomena of retail gasoline  
prices rising quickly, but falling so much more gradually. Its  
strictly a function of competition in the marketplace.

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.

You may be surprised to learn that gas stations make the bulk of  
their profits on the quickee mart / convenience store, or on  
automobile repairs -- and not on fuel. They are greatly incentivized  
to keep the prices low enough to draw you in as a customer, where  
they can make their profits on, well everything else beyond  
petroleum . . .




Resources: For additional information, see the following

WTRG Economics
(terrific resource for analysis, planning, forecast and data services  
for energy producers and consumers)
http://www.wtrg.com/

Prices: Crude Oil, Heating Oil, Gasoline and Natural Gas
http://www.oilnergy.com/1cashpet.htm#gaso

Gasoline Price Pass-through
by Michael Burdette and John Zyren
January 2003
http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2003/ 
gasolinepass/gasolinepass.htm

Gasoline Price History
http://www.ghg.net/stuart/gasprice/gasprice.html






Barry L. Ritholtz
Chief Market Strategist
Maxim Group
405 Lexington Avenue,
New York, NY 10174
(212) 895-3614
(800) 724-0761
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The Big Picture: Macro perspectives on the Capital Markets, Economy,  
and Geopolitics
http://bigpicture.typepad.com/comments



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