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The fact that since the first of the year crude oil has slid over 16% while the national average price of gasoline has fallen only 5% really bothers me. So, on that note, I’ve decided to do a little bit of research and a whole lot of math in order to try and figure out what the heck is going on.
First off, let’s assume that we’re working under the premise that the price of crude oil makes up about half of the price of gasoline. After doing some research, this seems to be a pretty standard and accepted idea.
On January 1, the national average gas price was $2.33 per gallon while the price of a barrel of crude oil was at $61.25. In sticking with the theory that the price of oil makes up half of the cost of gasoline, the $61.25 per barrel equaled $1.165 worth of gasoline.
As of January 16, the price of oil had fallen to $51.21 – 16.4% lower than the price on January 1. According to the above theory, the price of oil on January 16 should now equal $.974 worth of gasoline:
(1 – .164) * $1.165 = $.974
Assuming the non-oil 50% of gasoline (taxes, additives, advertising, salaries, etc.) was a fixed cost – not that unreasonable – the new price of gasoline should be $2.14 per gallon, roughly 8.2% lower than it was on January 1:
$1.165 + $.974 = $2.139
Unfortunately, the national average price of gasoline on January 16 was $2.22 – only 4.7% lower than what it was on January 1.
This leads me to one of two conclusions:
- The “fixed” costs actually increased by 6.9% as oil prices went down, or
- The system is rigged so there is enough lag time built in for oil and gasoline companies to take advantage of the arbitrage.
Considering the billions of dollars in profits these oil companies take in, in addition to the fact gasoline prices shoot up at the first hint of a rise in the price of oil, which of the two scenarios seems more likely?
{ 3 comments… read them below or add one }
You’ve left out the speculation aspect of gas prices and that’s really the “unknown” in your equations. Wholesale prices of a barrel of oil are determined by perceived supply, known demand, and expected demand. It’s the guessing of what’s coming in the future that gives this whole thing a “floor of the stock market” feel.
Additionally, gas stations purchase large quantities of fuel to store in underground tanks. As I understand it, the fuel is purchased and paid for up front. Vehicles purchase the fuel in smaller increments which means that the fuel is drained from the underground tanks over a period of time. The period of time between fuel deliveries to the station can and will experience fluctuations in the wholesale price of fuel. Gas stations will keep the price of gas “artificially” high in order to hedge their bet against increasing fuel costs.
I think it would be very unusual if gas prices fell at the pump at the same rate at which the price of a barrel of oil fell.
Scenario: a local gas station purchases a tank of gas at the wholesale rate of $1.90 per gallon. The gas station receives deliveries every 2 weeks. The retail price of the gas is $2.00 per gallon. 3 days after receiving the delivery, Iran shuts down oil production completely and the wholesale price of gas increases to $2.75 per gallon. In order to purchase the next tank of gas, the gas station is forced to increase the retail price of gas immediately.
Scenario: Iran resumes oil production, but they’re politically shaky. If the gas station returns to the $2.00 per gallon price of gas will they have enough to purchase the next tank of fuel? It’s unknown, and that’s where you find local gas prices falling slower than they increase.
Given this explanation,the system is set up guranteeing the retailrs a profit. good but is that how the free maqrket is supposed to work? On the back of the consumer? No wonder the Mega corp make gigantuan prfis.why cant the retailers pay the price at pickup?Or better still why cant the increase in crude oil price be factored in every week instead of as the bids rise on the mercantile exchange.
It appears the American people have been ripped-off way too long. I believe that it is time to have an energy revolution. The “opening volley” can be viewed at http://desakrisson.topcities.com
Working together, we CAN help free the American consumers from bondage to “predatory oil” and their allies. It is time to put the power back in the hands of the people, where it truly belongs.