Prices will fall, not plummet, at the pumps

NEW YORK -- The headlines say oil prices have fallen 15 percent this year. Gas station receipts tell a different story -- the cost of filling 'er up has slipped from about $35 to $33. Big deal.

The cost will probably drop further, but drivers shouldn't hope for a big windfall at the pump: there's a lot more that goes into gasoline prices than the current cost of crude oil.

Besides taxes and the costs of refining, distributing and marketing, there are factors such as local competition among gas stations. Just as with other forms of retail, consumers see savings when one retailer lowers its price, and the others scramble to match it.

"If gasoline costs me a dollar a gallon, and my competition down the street is selling it for 89 cents, my customer doesn't care what I paid for it," said Richard Oneslager, president of Balmar Petroleum, which operates 14 gas stations in Colorado.

Crude oil prices have fallen from about $61 to $51 a barrel this year on the New York Mercantile Exchange, but the price of gasoline on the side of the road has declined more slowly. The average price for a gallon of regular is down about 13 cents from $2.33 on Jan. 1 to $2.20 on Friday, a day after crude briefly fell below $50.

A typical car holds 12 to 15 gallons, so if it's filled four times in a month, that's savings of less than $8 in a month -- not even enough for that daily cup of coffee.

Pump prices haven't plunged to $2 a gallon yet, which is where they were back in early 2005, when crude oil prices were also around $50 a barrel. The big difference was that, unlike now, crude oil wasn't coming off a record high of $78 a barrel just six months earlier.

Essentially, the recent price drop hasn't completely sunk in on the wholesale level, so gasoline retailers are still paying a lot for their product and won't lower prices until competition forces them to do so.

The Energy Department says the price of crude oil accounts for about half the retail price of gasoline. That means if crude oil is down 15 percent, pump prices should be down almost 8 percent.

But the time it takes for a drop in wholesale prices to fully affect retail prices is around 12 weeks, though most of the drop happens within the first two weeks.

"Retailers aren't making their price decisions on the price of crude oil," said John Eichenberger, vice president of government relations at the National Association of Convenience Stores. Instead, they focus on how much they paid for their current load of gasoline, and how much their supplier is telling them their next load will cost.

"We don't care about anything except what that tank the truck just brought in cost," Oneslager said.

A sharp rise in crude oil is another story. After crude spiked to record highs the past two summers, it didn't take much time for gasoline prices to follow suit. That's mainly because retailers got nervous that their next shipment of gasoline would cost a bundle, and also because they knew that summer demand is high and drivers could at least for a while pay inflated prices, albeit reluctantly.

The average gasoline retailers have to charge 13 cents per gallon more than they paid to break even, Eichenberg said, and mark it up even more to make a profit.

The Oil Price Information Service shows that in 2006, the average gross margin for retailers was 13.76 cents a gallon -- meaning profit was less than a cent per gallon. Because of credit card transaction fees, the credit card industry profited more from gasoline sales last year than gas stations did, Eichberger said.

I thought I'd repost the chart for ease of discussion re: some of your points.

Sorry but you might notice the spike began in 3/12 and prices rose for four periods before steadying out a bit...The price of gas fell in 75% of the time that it took to go up. Proving conclusively that prices do not rise faster then they fall."

I'm not arguing that the price of gas DOESN'T fall eventually, or that it doesn't fall quickly. But I'm definitely sure that this chart doesn't 'prove conclusively' what you say it does. Look, for example, at what I'm noticing here at the various rises and drops from 4/17 to around the end of June. While the earlier gas price rise seems to correspond to oil, its drops look to correspondingly drop later and less. Say that the gap between crude and gas on 4/17 is the benchmark for the rest of that period. The lines should drop as crude does, but they only minimally track, and gas only varies slightly as crude goes up and down widely. I can't look at these and say unequivocally that 'prices do not rise faster then they fall.' Only when the broad trend in oil is a substantial drop in price is gas price seeming to drop correspondingly, and yes, in some cases quickly.

Consider for example the week of 4/17 where there is a small short spike in Crude but no corresponding spike in gas. Please point out ANY corresponding spike in gas that is not found in crude.

But as I note above, the broad spike in crude has already happened, 'broadening the gap' between gas and oil price, and that not only is there little movement after the price rises, there is almost no movement after substantial drops in oil price. Actually, I'd like to see a chart that shows the current cost of crude oil as a percentage of the current price of gas, which would better settle this discussion. And before you say it, YES, I know that crude now doesn't and shouldn't track prices now precisely. I'm just making the argument for academic purposes here, not out of some grand commitment to bagging on oil companies or gas sales outlets. They are fun to bag on, yeah, but only in a Rat stupid class warfare way. I'm only saying that here, I do see how the data might be supporting the conventional wisdom that gas sales prices don't track crude as quickly on the drops as they do on the rise. But such a chart as I suggest would show what time lag is present quite nicely.

Are you saying that as the price of crude rises that gas stations make less of a profit margin?

Nope, I'm saying that from this chart, the reverse seems to be true. If you look at the gap between the two prices, when oil prices are high, gas prices rise higher, as measured by the width of the gap between the two. When oil prices are lower, the gas prices are dropping more widely. From a consumer perspective, it looks like when oil's cheap, prices are more competitive, but when oil's expensive, gas sale prices all get in line, and at a higher level.

I'm not arguing that the price of gas DOESN'T fall eventually, or that it doesn't fall quickly.

But that is what you said before.

consumer price rises faster than it falls.

As I proved it does indeed do so.

The lines should drop as crude does, but they only minimally track, and gas only varies slightly as crude goes up and down widely

LE are you sure that you are reading the legends on this chart closely? Of course gas varies slightly as crude goes up and down widely.

Crude is shown at dollars per barrel and gas is shown in dollars per gallon.

Going down one square is only a change of 0.12 cents for gas and a change of $2.80 for crude. It is impossible for gas to follow oil exactly but they do track. I don't know how you can say that they don't.

Look, I know what I posted. To admit that the price of gas does fall eventually, or that it does fall quickly SOMETIMES, is not to concede that consumer gas prices do not rise faster than they fall. Your argument is essentially the same as saying that, if I concede that the sun appears to rise in the morning and appears to set in the evening, I've conceded that the sun rotates around the earth. Just because I agree that in some cases the conventional wisdom doesn't appear applicable, doesn't mean I agree that it is entirely false. Generalization from this chart's broad lines does not somehow make invisible that the specific lines do NOT track, and that oil spikes down AND up are simply not entirely reflected in gas prices on this chart.

I addressed your chart and tried to show you that where oil prices have fallen in some periods, gas prices have not fallen correspondingly steeply or quickly. I've tried to be reasonable and discuss this with you from the standpoint of one who is entirely disinterested in the outcome but interested in the validity of the conventional wisdom. I pointed out that I'd prefer to have a different chart which I think would settle the matter entirely--and have been clear, I think, that disagreeing with you whether the matter is proved is not the same as disagreeing with you ultimately. If you choose to ignore my post, instead of responding to it, and claim you've proven something that is nowhere near proven by simple repetition or obfuscation of my earlier remarks, so be it. The topic isn't that important to me that I'll continue discussion.

The price of gasoline in ANY STATE is far far more than 9 cents.. Government makes more money on taxes from "ENERGY" of ALL forms than the producers do.. FOR DOING LITERALLY NOTHING..

Please read my post again. You'll see that I wrote that the price of gasoline in Kansas is 5 to 9 cents a gallon MORE that in Missouri. That difference is due to a difference in the gasoline tax. It has nothing to do with transportation costs. Stations owned by the same company, less than 1 mile from each other on opposite sides of the state line have a price difference of up to 9 cents a gallon.

Mark

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