Wes Moss: Why are gas prices dropping so slowly?

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

Wes Moss hosts 'Money Matters' Sunday mornings on AM750 and 95.5FM News/Talk WSB

Wes Moss hosts 'Money Matters' Sunday mornings on AM750 and 95.5FM News/Talk WSB

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

Tweet

Follow Wes Moss: Twitter | Facebook | Email

16 comments Add your comment

[...] From Atlanta Blogs News Source: http://blogs.ajc.com/atlanta-bargain-hunter/2012/07/16/wes-moss-why-... ____________________________________________________ [...]

Mike

July 16th, 2012
8:01 am

It should be pointed out that wholesale gasoline prices have gone UP 30 cents a gallon in the past month.

adam

July 16th, 2012
8:37 am

obama’s fault

jd

July 16th, 2012
8:54 am

As to point 2 — the correlation between futures contracts for crude and gas is days, not months — except when the price goes down. As to refining capacity, we have been exporting surplus gasoline for the past year

Jack

July 16th, 2012
9:17 am

The prices go up INSTANTLY when oil prices rise and drag on forever using lame excuses like yours. Bottom line rich get richer , poor get poorer. Capitalism has failed miserably. We reward GREED (See bank bailouts, oil companies,etc.) in our failed capitalist experiment. We sell out our country (see outsourcing, CHINA) to a totalitarian communist country no less….that HATES the USA.

try this

July 16th, 2012
9:40 am

Jack, you know not of what you speak

Chris

July 16th, 2012
1:07 pm

“Fact” 1, so what you are suggesting is that gas station owners could be guilty of collusion, or artificially keeping a higher price? Also, you suggest that they eat the initial cost, Not what I have seen, as a lot of gas stations tend to jump their price the same day that that something in the market escalates.

“Fact” 2…so why then do gas prices respond to price increases on the stock market in a few hours, but don’t respond to price decreases for several days? You answered part of it, but make no mention of why pump prices increase so dramatically rather quickly.

“Fact” 3, so what you are saying is that the companies are gouging us because we aren’t using as much as before….so the companies are creating a false decrease in supply, and therefore false, non market prices? Interesting…so why aren’t they in prison yet?

Tensions in Iran….never mind that Saudi Arabia has agreed to supply any and all oil that was supplied by Iran, rendering that a moot point, as in no change in supply, therefore no change in cost should be seen.

David Granger

July 16th, 2012
3:17 pm

Lauren, I used to live in Duluth, and just up at the corner was a small, independent convenience store that carried Texaco gasoline. Tom, the store owner, used to compete with a Racetrack station that was close by over on Peachtree Industrial. He’d drop his price a penny, and then Racetrack would drop theirs two cents, and it would go on and on…eventually they’d both bottom out and we’d have two stations close by where we could get gasoline about as cheaply as anywhere in the Atlanta area. It was nice, and both Tom’s station and the Racetrack would get a lot of customers. They’d break even on the gasoline, and…as Wes points out…they make a lot more on beer, and sodas, and snacks, and oil, and…etc.
Then Texaco opened a corporate-owned convenience store over on Hwy 141. And the gas wars between Tom and Racetrack were over. The Texaco oil company (through the local distributor) prohibited Tom from selling his gasoline lower than THEIR corporate convenience store. Tom talked to a lawyer, but there was nothing he could really do.
Whenever there’s an oil company spokesman on national TV speaking in reference to gasoline prices, they always mention the usual things: Worldwide demand, the price of oil, the supply, etc…and they always mention somewhere in there that the price of gasoline is party a product of the free market. And I do support the free market, but it should be a “free market” going in both directions…up AND down. If someone like Tom wants to price his gasoline low enough just to break even and attract more customers, then that should be part of the free market as well…not prohibited by the oil companies to stifle competition with their own stores.

Ole Guy

July 16th, 2012
3:54 pm

Has anyone been to a European country lately? If you have, you will quickly reliaze that WE JUST DON’T HAVE IT THAT BAD. We have become so gd spoiled to the notion of cheap, plentiful energy…if you insist on ascribing to the “those lousy oil barons” theory (not entirely without merit), YOU can take the initiative and DO SOMETHING about it: LEARN TO DRIVE A BIT MORE REASONABLY, you know, like SLOW THE HELL DOWN, avoid the jackrabbit starts, etc.

YOU ALL KNOW THE GIG, YOU’RE ALL JUST TOO GD LAZY TO ACTUALLY DO SOMETHING ABOUT YOUR PROBLEMS. You choose, instead, to gripe and complain. You all deserve your sad lot of financial woe and misery. Mr Moss, and all the financial wizzards of the world can’t help you…only YOU can. GOOD FREQUIN LUCK ON THAT ONE!

Ben

July 16th, 2012
3:55 pm

Wow, some of the commenters don’t seem to understand how markets work. Let me give it to you straight… If you make it so gas station owners can’t make a profit, then there won’t be any more gas stations. Profit is the entire reason we can find gas on nearly every major intersection.

Most industries have a far higher profit margin than gas resellers. If you don’t think they should make any profit, then where the heck do you think you are going to get gas? No one is going to give it to you for free.

RaleighDawg

July 16th, 2012
9:06 pm

How does this guy continue to have a blog – and a later question, why do I continue to waste time reading it ? Just a few weeks ago WSB had a special on dealing with the price of gas in ATL/US and discusing why the US isn’t buying more oil from Canada (another topic for another time).

During this special WSB stated that (at the time) the time average prices in ATL were $3.10/gallon and that retailers were paying $2.60/gallon. Now I’m not a math wiz, but I’m pretty sure that’s a .50 per gallon profit that provides an almost 20% return. Don’t know about you all, but I’d be pretty happy if I had investments returning almost 20%.

Let’s all be honest about this – gas prices don’t fall after the run up because they don’t have to. What is the average person going to do ? Not buy gas to go to work or get our kids to school ? For 50 years the oil companies and our government have colluded to keep the general public enslaved to these powers that be and the Middle East.

In 1980, Brazil imported 77 percent of its oil. Now it imports 0.0 percent. During that same time period, America increased its oil imports from roughly 30 percent to 70 percent. If Brazil can become completely self-sufficient in oil, why can’t America start becoming more self-sufficient? That’s right – because the US Government and Big Oil do NOT want us to. It’s this simple.

[...] (blog)Gasoline prices fall more, but slide may be over: surveyChicago TribuneThe Hour -Atlanta Journal Constitution (blog)all 469 news [...]

[...] slide may be over: surveyChicago TribuneHave Gasoline Prices Bottomed?CNBC.com (blog)The Hour -Atlanta Journal Constitution (blog)all 483 news articles »More Info: [...]

[...] prices fall more, but slide may be over: surveyChicago TribuneGas prices rise slightlyThe HourAtlanta Journal Constitution (blog) -Attleboro Sun Chronicleall 485 news [...]

GenX

July 18th, 2012
10:04 am

Amazing how the price per gallon goes up in a matter of hours when oil prices go up, but take weeks to go down when the oil prices go down….something not right with this equation.

onechris

July 21st, 2012
1:54 pm

Sad to say but prices will never go down again but only up so reduce your need for gas now and seek other methods to get around such as walking, biking, etc. People in the rest of the world have used scooters for decades to escape gas prices.