Explaining the oil-gasoline price disconnect

I've noticed another behavior, even though I don't drive. As prices go down in a city, it is usually a few outlets that move the price down at a time. So, in effect, people keep buying at the higher prices because it is hard to drive around shopping for gas and know which is the cheapest. There's a lag time until they notice the drop, and so continue buying at their normal place.

Some cities have media that report on prices for you, but not everyone probably accesses it.

A small point.

Could it have to do with refineries hedging strategies? Perhaps when the price goes up, refiners, who have collars use the knowledge that the public has of oil prices to grab an instant profit (because even though the spot price of oil is higher, the net price they are paying is constrained by the hedge). As long as none of their other competitors blink, this works for a while. But after a while, demand for gasoline slackens and they become over-hedged. So even though the collar was created to protect them from high oil prices, they end up paying margin payments on their excess hedging. So it takes a while for gasoline prices to drop.

On the other side, if oil prices fall, their collars have created a floor that makes it very costly for them to lower the price of gasoline until the collars unwind.

Just a guess.

Here's a better explanation:

Most gas retail outlets (no regard to ownership) make most of their money on convoyed sales...that is the chips, coke, candy and snacks.

When gas prices rise rapidly and consumers are in a hurry to purchase before either supply runs lows and prices rise...gas station operators raise prices to encourage less consumption and maintain consistent traffic flow. This way as a hybrid retail outlet (low-volume / high mark-up food/retail center combined with a commodity) they can retain some gas, sell a little less on higher mark-up (and granted this takes away from store sales to a degree), but still keep selling the stuff with highest gross margin.

On the downside, the same is also true, but pricing is a bit stickier. You see, the only real draw for the majority of folks is the gas. When it runs out, most don't have a reason to stop at your store. By maintaining price points at what seem like sticky high levels, the store is able to 1) ensure they don't lose too much money on gas sold (buying at a higher price and selling for less loses you money) and 2) they ensure they don't run out so that you can maintained the convoyed sales of goodies (this is where the money is made and if people spend less on gas [provided you have it] then they are able to spend more on the high-margin stuff that actually makes you money.

As for the refineries, they have hard margins that they try to hit. There is a certain cost to cracking various forms of crude. Below a certain cost, the refineries margins get really squeezed. For them, this typically happens on the way up in oil prices. The consumer becomes constrained on what they can spend and eventually demand destruction means that they can't charge anymore without excesses of their products sitting around (btw, sitting cracked petro products can go bad in time , my chemistry background). They could end up buying oil at prices and cracking and not make any real money.

On the downside of oil prices, unlike the retail guys, they are able to increase demand (without destroying their business model) while paying less for the initial stage product and charging slightly less for a product in which their fixed costs are sinking. This means they are making more money. Check out how Valero (just refining side) and others are doing versus the services and petro guys. One side has a sustainable margin and the other is getting drummed.

That is the simplified version, of course, because some retailers and refiners (i.e. Valero) work in concert and other work in concert with oil producers and the services sector (Exxon - at one point did retail, refining, services and production). The real explanation for why prices move up fast and down slow should simply be explained as the various parts will do what is in their interest to either make money or to keep from losing their shirts.

Sorry for the lengthy response, but this is an abbreviated calculus course in oil industry economics.

yho i a have one doubt how does the price of oil goes up when dollar weakens ?

JAYANTH N,

Simpley by the fact that oil is priced in dollars. As dollars get weaker, it takes more dollars to buy the same amount of oil.

We all know full well that when the price of crude jumps up in the markets that we'll all pay for it the next day at the pump, and I wasn't really expecting it to be the same way when the opposite happened. Around here in Central/Southern New Jersey gas can be found for about $2.60 as of today. I'm actually pretty happy with how far and how fast the price of gas has come down so far.

It's pretty simple from a local perspective:

Gas is sold at futures prices, and is partially based on how much the stuff in that tank in the ground cost. If the price of futures gas goes up, prices immediately go up at the pump (they have to buy that gas in the future, after all). But they have to make SOME money on what's left in the ground, bought at a higher price, even if the futures price drops.
So although the price of oil and gas goes down on the futures market, the stuff in the ground was expensive when bought and will have to see some profit made on it. Check out delivery schedules and gas stations sometime. The prices rise at the same rate, but those with the greatest number of deliveries (with the most gas sold) will be significantly cheaper than those with fewer deliveries because the stuff in the ground is being sold off faster and the newer gas costs less.

Your readers don't care where you live or how you get to work. You're not the story. If you don't know what the current gas price is, you could do some reporting instead of making excuses for the lack of it. Takes all of 5 seconds to look up. Sheesh.

As long as the prices goes down, does that really matter? Look at the retail prices of SUVs. 3 months ago dealers where giving them away almost for free.

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