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Gasoline versus Crude Oil prices

Posted By Barry Ritholtz On August 15, 2004 @ 6:51 am In Finance | Comments Disabled

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 [1]
(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 [2]

http://www.oilnergy.com/1cashpet.htm#gaso

Gasoline Price Pass-through [3]
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 [4]

http://www.ghg.net/stuart/gasprice/gasprice.html


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2004/08/gasoline-versus-crude-oil-prices/

URLs in this post:

[1] WTRG Economics: http://www.wtrg.com/

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

[3] Gasoline Price Pass-through: http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2003/gasolinepass/gasolinepass.htm

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

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