Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
It’s been a little more than a year since I first wrote about the lag effect of prices at the pump versus the price of oil. Nearly 70 percent of the cost of a gallon of gasoline is oil — a direct correlation. So why don’t we always see a significant drop in gas prices in the wake of oil’s price tumble?
Here are the facts:
1. Gas station owners make very little profit from selling gas. They might mark it up by 10 cents a gallon, but after employee salaries, rent/mortgage payments and credit card fees, their profit might 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 takes time — several weeks to 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 might be made from oil far pricier than the current vintage.
3. Many refineries have been shut down as corporations focus on the more profitable areas. The peak refining capacity the U.S. had a few years ago no longer exists — largely because we aren’t demanding as much gasoline as we used to.
Here’s where we stand:
Oil prices have fallen about 23 percent from their March highs of more than $111 a barrel. Tensions in Iran have kept somewhat of a floor above $80 a barrel, but the downward trend is a result of Europe’s economy sliding into recession and fears mounting that Asia’s economy may be catching that same cold.
The average gas price in the U.S. has fallen about 13 percent since peaking in early April — lagging the change in the price of oil. But with worries about economic slowdown headed into 2013, expect there to be continued downward pressure on gas prices through travel season.
Are you going to change your summer travel plans if prices at the pump fall below $3 per gallon?
– By Wes Moss, for Atlanta Bargain Hunter