Wes Moss: Why gas prices take so long to drop

Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here Monday mornings.

Wes-Moss-032011-USE-THIS-VERSIONOil 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.

Do you drive around looking for stations with the cheapest gas? Is the price of gas affecting your spending in other areas, including the type of car you drive?

– By Wes Moss, for Atlanta Bargain Hunter

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24 comments Add your comment

jj

May 23rd, 2011
9:26 am

There have probably been a hundred articles similar to this one in all the papers and financial sites over the past few weeks. Virtually every one of the shows a profit of 8 cents per gallon. Still not big money, but 4X what Mr. Moss states.
2) On the up side the price at the pump moves within hours of a big jump in oil prices. This is well ahead of the price from the depot, and is covering gas in the tank purchased at lower prices.
3) Virtually every refinery in the Mississippi delta stated they saw no problems with the impending high water. But with the help of the media, speculators ran with the story of how the refineries could be shut down. .

dd

May 23rd, 2011
10:34 am

Point 2 is not an excuse, like the poster above said, why does it spike immediately if oil goes up. The gas in the tank was paid for weeks ago. They are out to screw us all and we continue to let them!

verysoreloser

May 23rd, 2011
10:39 am

When 45% of oil futures prices are based in investor riffraff in the exchanges and 70% of gas is based in oil prices, that’s the cause of high gas prices ultimately. Hedgers should be allowed to work the exchanges, speculators not so much.

Dunwoody Mike

May 23rd, 2011
10:40 am

Notice how he completely ignores the role of financial speculators in this mess. Oh wait, he probably is a financial speculator himself.

MM

May 23rd, 2011
10:47 am

And the prices of everything else that rises when gas prices rise, are not coming back down either. The groceries are getting VERY expensive…..and when gas prices do drop, groceries don’t.

RaleighDawg

May 23rd, 2011
10:48 am

Agreed this guy’s clueless- everyone understands there is direct correlation between the price of oil and the price of gasoline and we’ve all seen price jumps IMMEDIATELY when crude prices jump.. The real reasons for the high price of gasoline: 1) collusion between OPEC, the large oil companies, and the government to artificially increase prices; 2) speculators who control the futures market by ‘buying up’ the price the oil; and 3) most people who have jobs have to drive (or pay someone to transport them) to that job therefore requiring us to pay WHATEVER price gasoline may be.

Truth Be Told

May 23rd, 2011
10:50 am

Or it could be price fixing at it’s finest.

spanky

May 23rd, 2011
11:04 am

Never answers the question “Why does the price of gas immediately spike relative to the price of oil on the open market, yet remain high after the price of oil falls.”

It also takes time — several weeks to several months — to pump a barrel of oil,…blah, blah. Takes a few minutes for the price to go up on the oil that was pumped at a lower cost.

The real reason is the idiots that continue to purchase 16 mpg SUV’s. They are using a disproportionate share of a resource which causes the price to increase for everyone else.

Unless the SUV is driven by a hot chick, they should be banned. I volunteer to spank all the hot chicks that drive SUV’s. That will fix our problem. And help with mine.

Fred

May 23rd, 2011
11:06 am

Or it could be you’re a bunch of ignorant whiney azz babies always pizzing and moaning. Open a gas station and call it Mother Teresa’s Gawdamm Gas if you don’t like it.

Your beloved benefactors in D.C. tax ten times the profits taken from each gallon. It’s always the market’s fault, aint it Adolph.

dawgonit

May 23rd, 2011
11:07 am

Why has the wholesale futures price of gasoline (RBOB) dropped 60 cents a gallon from it’s peak, while the retail price has only gone down 15 cents? Everytime the price of oil goes down, there’s an excuse to keep the price of gas up… unrest in the middle east, fires in Canada, flood on the Mississippi.

Summit Dawg

May 23rd, 2011
11:21 am

Seems to me that once they got it to $4 a gallon, when they drop it to $3.50, it’ll make the consumers feel good that they are able to buy it at $3.50……but why not go back to $2 &
under???….never happen….the environmentalist have worked for years to see it the same price as it is overseas……and it will stay high!!!!

jarvis

May 23rd, 2011
11:27 am

Summit Dawg, you need to check your facts. Gas in the UK is at about 6 pounds per gallon. That’s about $10/gallon US.

Donald Dougherty

May 23rd, 2011
11:29 am

Gas prices continue to be high because the oild companies are greedy and are probably getting kickbacks from OPEC. If they’d realize that they are the only customers that OPEC has, they could get together and force OPEC to drop their prices. But, if they are getting kickbacks, they’re not going to do that.

renegade

May 23rd, 2011
11:29 am

Blame the gas spikes on the time of day. Walmart here where I live in Thomaston generally jumps 3 times a day and falls 3 times a day.First jump is about 7 a.m. when people are on the way to work, then it will go down for about 3 or 4 hrs or until people take off for lunch then it will jump up for about an hour then go back down til school gets out ot 3:30 then its back up peak traffic hrs = peak gas prices. People this is greed not economics the surrounding towns around here are 8 cents to 15 cents cheaper on their gas prices. People say shop in your home town to boost the enonomy there; well screw that I’d rather get ripped off by a stranger than someone thats supposed to be a friend and neighbor.

mntnmanfinfan

May 23rd, 2011
11:30 am

The real reason is because they can…no one to stop them…do whatever they want…no matter how it hurts the economy or we the people…

mntnmanfinfan

May 23rd, 2011
11:31 am

And do you notice that these columns are all written by money changers — the people who are making the most out of speculation on oil as a commodity.

Da Mick

May 23rd, 2011
11:31 am

….and don’t forget about about Moammar Kadafi — that’s always a good reason for high gas prices….and how about the pope calling the space station — there’s a sure indicator of problems at refineries.

Now that we’ve had prices up to $4 per gallon, we’re all going to feel like they doing us a favor by bringing it down to $3.50 per. I’ve been watching that pattern since the first gas crisis in the 70s.

But it was a good try at making it all sound so reasonable, Wes, and not the ongoing scam it is. I just wish somebody would oil this damn wheel in my cage.

Gaspains

May 23rd, 2011
11:48 am

Got gas yesterday in Alabama for $3.49 gallons – 20 miles over Georgia line. Cheapest gas seen in Georgia was 3.79 gallon. And Gerogia is suppose to have cheaper gas taxes. Expain that one….

Who cares

May 23rd, 2011
12:37 pm

Use Gasbuddy on your smartphone. Gas will be under $3 by labor day.

truthpaste

May 23rd, 2011
12:42 pm

Gas will stay high because there is profit to be made in desperation.

southgadawg

May 23rd, 2011
1:29 pm

The main reason gas prices are so high is because we have a pseudo-shortage of refined gas products, not an actual shortage of supply or a larger demand than supply. The refineries are not operating at full or maximum capicity because the major oil companies have found they can sell less for more. Look at their record profits and the lopening of new fields are not going to correct this problem. It would be better for everyone including these greedy large companies to step up production from the available oil that is actually plentiful and drop the price of the finished product and give the American consumer more ready cash to spend in all areas of the economy rather than just in one area – ENERGY. By doing this they would actually see their profits be greater because more people would be working and spending is all segments of the economy.

mystery poster

May 23rd, 2011
2:58 pm

Saw a blurb last week in the news about allegations of something to do with the refineries. Either price-fixing, holding back supply to jack up prices, or something like that. I didn’t hear the whole story, only the teasers on the news about an investigation. Did anyone hear that?

Ack

May 23rd, 2011
3:13 pm

OK so I understand why there is a lag when it comes to oil prices coming down. Why is there no delay when oil prices go up?

Ben

May 23rd, 2011
3:42 pm

It’s all one great big shuck and jive. Gas prices have increased at an alarming rate since the late 90’s and have shown no sign to ever come back down. I realize that there are reasons for steady increases but the increase has not matched wages, cost of living, the auto industry’s reluctance to make more fuel efficient cars, etc.

Yet the gas companies want to get more subsidies and pay no taxes?

I almost wish gas would go to $20 a gallon and cripple our economy so we would be forced to change our way of life and dependecy on oil.

Almost.