Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here Monday mornings.
Oil prices fell roughly 15 percent in early May, from nearly $115 per barrel to less than $100, where they remain.
The price of gas correlates directly with the price of oil — nearly 70 percent of the cost of a gallon of gasoline is oil. So why haven’t we seen a significant drop in gas prices in the wake of oil’s price tumble? And why does it always seem gas prices spike up with oil prices, but only slowly fall when the price of oil retreats?
Consider these factors:
1. Gas station owners make very little profit from selling gas. They may mark it up by 10 cents a gallon, but after such costs as employee salaries, rent/mortgage payments and credit card fees, their profit may be only 2 cents per gallon. If the average station pumps about 4,000 gallons daily, that’s just 80 bucks of gas profits for an entire day.
The station owner’s real profit comes from selling sodas, candy bars, cigarettes and other items. Gas lures the customers, but Red Bull and Cheetos pay the bills.
When wholesale gas prices go up, stations actually eat some of the initial rise to continue luring drivers with tolerable gas prices. But when wholesale prices start falling, station operators see a chance to boost profit margins by keeping pump prices high. In a perfect example of market capitalism, this strategy works until a nearby station lowers its prices.
2. It also takes time — several weeks to several months — to pump a barrel of oil, convert it to gasoline and get it to your local filling station. So the gas you bought today may be made from oil far pricier than the current vintage.
3. The weather also has been problematic. Some 13 percent of U.S. refineries are located between Baton Rouge and New Orleans. The Mississippi River’s historic flooding has put those refineries in peril, creating upward pressure on gas prices.
The dynamics of gas pricing may seem complex, but the bottom line is the price will fall with the price of oil –- eventually. If oil prices stay below $100 per barrel, we will see cheaper gas in the weeks and months ahead.
– By Wes Moss, for Atlanta Bargain Hunter