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Why gasoline follows oil up but not down

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Why gasoline follows oil up but not down

Postby knapplc » Fri Jan 12, 2007 12:57 pm

Good article. We pretty much already knew this, but it's interesting to read it anyway.

Why gasoline follows oil up but not down

The short answer: service stations do it because they can. But the amount they're making off you may be surprising.

NEW YORK (CNNMoney.com) -- If it seems like gasoline prices are quick to skyrocket when the price of oil goes up but then take their sweet 'ol time coming back down when crude prices sink, the answer is simple: they do.

"There is a rocket and feather aspect," said Tom Kloza, Chief oil analyst at the Oil Price Information Service.

And the reason seems to be simple economics.

The service stations are still selling the same amount of gasoline when wholesale prices fall, said Kloza, "so there's no reason to drop."

"Human nature being what it is, [service stations] typically react [to a spike in oil prices] by pushing prices higher even before they replace their in inventories," said Geoff Sundstrom, spokesman for the motorist organization AAA.

"And human nature being what it is, unless other stations bring their prices down, he's going to be very reluctant to bring down his."

But before you firebomb your local Qwickie Mart, Kloza said to remember that gas stations typically make very little money off the gas they sell, maybe a gross of 15 cents a gallon.

Out of that, they have to pay all their expenses, including fees to credit card companies that can eat up half of that.

"[People] think of every sector of the business as being run by John D. Rockefeller or J.R. Ewing," said Kloza. "People don't realize how little profit there is."

Service stations pay their bills on money made when people go inside to get things like coffee and Ring Dings, which are often sold at a decent mark-up.

There real money in oil, he said, is made at the production, refining, and, especially, the trading levels.

"All these exchanges are setting records," in terms of the number of contracts changing hands at places like the New York Mercantile Exchange, where brokerage houses will take a cut for each transaction. "That's where the big bucks are made."

Eventually, the free market steps in and prices begin going down when other nearby stations reduce their price.

And as opposed to government controls that would prevent stations from charging a little more when they can, AAA says that's just how things should work.

"The best way to assure a stable supply of fuel is to allow a free market to operate," said Sundstrom.

With oil prices sinking some 15 percent since the beginning of the year, Kloza said gasoline prices are sure to follow, although it will just a few weeks for the cheaper product to work its way into the system.

But Sundstrom warns consumers to not get complacent.

"We anticipate high prices over time, regardless of what they see in the short term," he said. "We'd hate to see consumers think our energy problems have been solved and jump into a new car that gets the same fuel economy, or worse even less, than the one they have now."

The problem I have with the whole thing is that the American economy (actually the World economy) would disintegrate if we lost gasoline. We HAVE to have this stuff. It's a necessity, not a luxury.

I wonder when we'll get word on the Hydrogen Car X Prize. Hopefully someone develops this very, very soon. :-/
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Postby RWLongy4 » Fri Jan 12, 2007 1:04 pm

The problem right now with hydrogen cars is that making them is extremely expensive therefore their price will be even more expensive.

I agree that we need an alternative because right now oil is the only game in town.
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Postby stomperrob » Fri Jan 12, 2007 1:08 pm

It always pi**es me off that the second the world price of oil goes up, the price at the pump jumps, but when the world price drops there's always some guy on the radio from one of the big oil companies saying that it takes time for the drop to to be realized at the pump.
And another really annoying thing, at least here in Canada, why does the price of gas mysteriously always jump on long weekend???
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Postby deerayfan072 » Fri Jan 12, 2007 1:34 pm

RWLongy4 wrote:The problem right now with hydrogen cars is that making them is extremely expensive therefore their price will be even more expensive.

I agree that we need an alternative because right now oil is the only game in town.

Actually the technology is there and would only take about 6-1o years to make cars readily available that run strictly on Hydrogen. I did a debate in Undergrad on cutbacks of Fossil Fuels. Bush actually has a pretty good plan, if you can believe it, that should be implemented, but hasn't yet. The plan is backed by a lot of scientists and good research, just needs to impemented.
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Postby Munboy » Fri Jan 12, 2007 5:10 pm

I can answer that question in a much shorter article.

Greedy gas companies. They made record profits in the Billions PER QUARTER last year and America has such a dependency on gas that we will pay whatever is at the pump and gas companies know that, so why lower prices? Also, big oil has the government in their back pockets by "donating" to campaigns. Congress could have levied a "windfall tax" against big oil, but decided not to (so they can get money to be re-elected).

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Postby houstonherdfan » Fri Jan 12, 2007 5:31 pm

well as long as the refineries stay in business making money I can work to feed my family.

Is the business in which I work.
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