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Real price of gasoline

June 21, 2012 - John Stack
I saw in a magazine where said the price of spark plugs were going up 15%. Must mean that the cost of a car is going up 15% also, right? Well, I think even someone with 5th grade math knowledge knows that just because one component of a product goes up 15%, doesn’t mean the overall product goes up 15%, or that it goes up immediately. The same goes for gasoline prices.

The price of crude vs gasoline is not linear at all. For example, on 9/18/2011, crude prices were about $87/barrel. On 12/23 it was around $99/barrel – about a 14% increase. During the same period, the price of retail gas DROPPED from about $3.57 to $3.23 a gallon. I don’t rmember anyone complaining that crude prices and retail gas prices weren’t linear then.

There many different inputs, or costs, from crude oil (unrefined oil) to the gasoline that we use in our cars. Of each 42 gallon barrel of crude, only about 20 gallons is refined into gas for our cars. The rest goes into plastics, tires, asphalt, and other petroleum based products. About 55-65% of the price of gasoline is related to the cost of crude. For instance, The rest is from taxes, distribution and marketing, and refining. There are also micro-cost influences. Some giant wholesalers actually carve NY into zones, and charge their customers up to 25 cents per gallon more depending on where the gas is going. Then, the amount we pay at the pumps takes all of these factors into consideration, then there is the ‘station markup’.

Most of what we pay for gas is out of any single entities control. When Hurricane Katrina hit, it clobbered our oil refineries in the gulf area badly. This caused a supply problem, with no lessening of demand, causing higher prices. Of course, crisis problems in the Middle East are all too well known to cause crude prices to be volatile. Over the last 30-40 years, OPEC has also controlled how much oil is exported, creating their own supply and demand pricing. Also, a current big partner is futures or speculative commodity trading for oil. If investors see problems in Middle East on the horizon, they bid up oil. If they see a green energy taking off, they wouldn’t see oil as a solid increasing investment and sell/buy futures at lower prices.

There is some truth to the rocket and feather increases. Ie – prices on retail gasoline rise like a rocket, but fall slow like a feather. But, this phenomenon is minor, and balances out in a short while as competition will cause retailers to price accordingly to other local stations. By and large though, what the local retailer is paying (see link) is almost completely dependent upon the wholesale price of the gasoline. NYS did a great investigation into possible price gouging last spring/summer. They surveyed 89 stations in NY. They checked how much the station was paying for gas of 3 different periods, and how much they were reselling it for. In the Plattsburgh market, it turns out of 5 gas stations surveyed, 4 lowered their average markup during the period where wholesale gas prices increased.

This would seem to leave the local retailer off the hook, and that is mostly so. Each local retailer often has different suppliers. Stewart’s may have one supplier, whereas Sunoco and Mobil may be tied into contracts with their parent companies. But…the markup on the gas does vary a lot. In the five gas stations in the Plattsburgh region surveyed, their markup on 2/11/11 was a low of 64 cents per gallon to a high of 91 cents per gallon. Different market conditions and other costs may be involved in these changes though.

Some left wing nuts have said a unified boycott of the material capitalistic inclinations of our country’s gas station providers would ‘show them’. As the ‘price gouging’ has been pretty much disproved, and any ‘rocket and feather’ correlation is sketchy at best, what would a boycott really do? Actually, it would most likely cause the stations not affected by the boycott to actually raise their prices, based upon higher demand (and lower supply, as their tanks only hold so much). Or, the suppliers to the boycotted stations would just sell their gasoline to the competitors, causing the boycott to be even less effective than the One Million Moms boycotts.

The only real way to lower the cost of gasoline is to lower the demand for gasoline. If demand decreases, over a long period of time, the price would also go down. There would stillbe a great supply of oil, but without demand for it all, it would have to sell for cheaper. Investors would stop seeing oil as a positive investment and drop their oil portfolios. If alternative energy source become more and more competitive with oil, consumers would have a choice. When there is a real choice, the lower cost item is what is usually bought. Either the gas price drops, or the alternative fuel gets bought.


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