Do higher gas prices mean more price volatility and gouging??

[joeynach]

My question is some what vague, but its something I have noticed in more recent years. With high gas prices becoming the norm, first $3 a gallon much of 2007, now $4 a gallon much of 2008, are the higher prices contributing to increased price volatility and price gauging?

 

In the past 3 years or so I have noticed much more volatility in has prices everywhere as well as much more varying prices from station to station, even within the same town or area.

 

For example, i live in Flossmoor, 25 miles south of the city and about 4-5 miles from the indiana border. Historically, indiana gas were generally about 10 cents cheaper than gas over in IL, due to taxes. Now with high prices you see differences between the two anywhere from 0-30 cents at times. Also even around town there is much more discrepancy among prices at stations, to the tune of a few cents to 30 cents a gallon. I will frequently see as prices 20 cents different from just traveling a couple miles or so down the road. This trend has been much more evident with gas at $3 or $4 a gallon than it was for the previous 25 years or so. Any explanations?

[Steve9347]

Any explanations?

There is no God?

[Texsox]

When gas was $2.00 per gallon a 2% increase would be .04, that same percentage is now .08 and much more noticeable. But generally speaking, companies have a better opportunity to gouge when prices are falling and they can keep some of the falling price for themselves. When prices are rising, people gauge prices much more carefully and there is more pressure on the retailers to keep the increase as small as possible. Also the taxes that are percentage based increase with the wholesale price, adding to the increase.

[jackie hayes]

Doubt it. I would guess that high prices would mean less opportunism, simply because people are paying a lot more attention to prices now.

[joeynach]

When gas was $2.00 per gallon a 2% increase would be .04, that same percentage is now .08 and much more noticeable. But generally speaking, companies have a better opportunity to gouge when prices are falling and they can keep some of the falling price for themselves. When prices are rising, people gauge prices much more carefully and there is more pressure on the retailers to keep the increase as small as possible. Also the taxes that are percentage based increase with the wholesale price, adding to the increase.

 

Ahh that makes sense, especially if the tax is % based on the price. That would mean u would see a larger discrepancy in price between IL and IN, which I have.

[joeynach]

The other thing I have always wondered about was the price difference between corporately owned/managed gas stations vs. individual owners/franchisers. Just the same way some fast food restaurants are corporately owned and operated and others are individual franchises the same is true of gas stations. You see this in fast food where there will be a promotion for some items "at participating locations only". Meaning its a corporate promotion and the franchise locations can choose to adopt the promotion or not, but I digress. In terms of gas stations the question is about corporate stations using established area prices vs franchise stations using whatever price they choose. Thus this would lead to frequent price discrepancies, differences from corner to corner, town to town, etc. In terms of right now the question is are the stations that are so quick to change their prices (usually increase) from day to day and from oil price to oil price the individually owned franchise stations. The theory being that the corporate stations would have prices closer to the wholesale price of gasoline since those stations would take longer to change their price due to time it takes for corporate wide price information to filter down and be established for the certain area. Basically my theory is that corporately owned stations are less price volatile then franchised stations.

 

P.S. The trend I noticed for years on gasoline retail vs. wholesale was always about a 50 cent per gallon increase. You can basically see what the general wholesale price of gasoline is by looking at the gasoline futures on wall st. Then just see what the difference is between what you pay at the pump vs. what the companies buy the gasoline at. Historically it was about 50 cent a gallon increase to wholesale is what you paid at the pump, but the marked IMO is out of whack. What you see today is a lot more ups and downs over a short period of time to this usual 50 cent markup. You can check out the wholesale futures price here

[RockRaines]

Well, the taxes on a gallon are pretty outrageous already, im sure prices will continue to climb and stay high since everyone is still buying gas.

[Rex Hudler]

The other thing I have always wondered about was the price difference between corporately owned/managed gas stations vs. individual owners/franchisers. Just the same way some fast food restaurants are corporately owned and operated and others are individual franchises the same is true of gas stations. You see this in fast food where there will be a promotion for some items "at participating locations only". Meaning its a corporate promotion and the franchise locations can choose to adopt the promotion or not, but I digress. In terms of gas stations the question is about corporate stations using established area prices vs franchise stations using whatever price they choose. Thus this would lead to frequent price discrepancies, differences from corner to corner, town to town, etc. In terms of right now the question is are the stations that are so quick to change their prices (usually increase) from day to day and from oil price to oil price the individually owned franchise stations. The theory being that the corporate stations would have prices closer to the wholesale price of gasoline since those stations would take longer to change their price due to time it takes for corporate wide price information to filter down and be established for the certain area. Basically my theory is that corporately owned stations are less price volatile then franchised stations.

 

P.S. The trend I noticed for years on gasoline retail vs. wholesale was always about a 50 cent per gallon increase. You can basically see what the general wholesale price of gasoline is by looking at the gasoline futures on wall st. Then just see what the difference is between what you pay at the pump vs. what the companies buy the gasoline at. Historically it was about 50 cent a gallon increase to wholesale is what you paid at the pump, but the marked IMO is out of whack. What you see today is a lot more ups and downs over a short period of time to this usual 50 cent markup. You can check out the wholesale futures price here

 

Its been a long time since I have been in the business, but I worked at the retail level as a DM for a couple of years. Here is how gas pricing worked at that time.

 

Retailers get very little markup per gallon. Ideally, a retailer would make about 10 cents/gallon. Since the prices are higher now, that number may be higher as they may be still looking for the same percentage. Often times, they would get much less.

 

Daily managers of convenience stores drive a local area and take a survey of gas prices from designated competitors. Gas prices are adjusted accordingly. Independently owned stations may not be as dilligent, so they may be slower to change their prices. I do know that gas companies consider their prices at the pump to be very competitive and they will change prices at a given station to react to such competition.

 

What would typically happen is that the cost would continue to rise, yet low cost/bottom grade retailers would hold their prices so all companies would do the same. Often times this would result in a station selling gas at a one or two cent margin or even below cost as I saw many times. One of my stations actually sold gas below cost for a whole month just to remain competitive. At a certain point, larger companies would decide to regain their margins and jump the prices 8-10 cents. This is called a restoration. The low cost retailers would always follow right up with their prices, but they would never lead a restoration.

 

Typically "majors" (Shell, Sunoco, Exxon, etc) would sell a few pennies higher than regional brands (Speedway, Thornton's, 7 Elevens, etc) regardless of the above factors.

 

The money on gas may be made at the wholesaler level of by the middle man, but it is not made at the retail level. Margins are held low and convenience stores are what bring in the cash. Low margins create the traffic, sodas, oil, fast food, etc make the $$.

 

[joeynach]

Its been a long time since I have been in the business, but I worked at the retail level as a DM for a couple of years. Here is how gas pricing worked at that time.

 

Retailers get very little markup per gallon. Ideally, a retailer would make about 10 cents/gallon. Since the prices are higher now, that number may be higher as they may be still looking for the same percentage. Often times, they would get much less.

 

Daily managers of convenience stores drive a local area and take a survey of gas prices from designated competitors. Gas prices are adjusted accordingly. Independently owned stations may not be as dilligent, so they may be slower to change their prices. I do know that gas companies consider their prices at the pump to be very competitive and they will change prices at a given station to react to such competition.

 

What would typically happen is that the cost would continue to rise, yet low cost/bottom grade retailers would hold their prices so all companies would do the same. Often times this would result in a station selling gas at a one or two cent margin or even below cost as I saw many times. One of my stations actually sold gas below cost for a whole month just to remain competitive. At a certain point, larger companies would decide to regain their margins and jump the prices 8-10 cents. This is called a restoration. The low cost retailers would always follow right up with their prices, but they would never lead a restoration.

 

Typically "majors" (Shell, Sunoco, Exxon, etc) would sell a few pennies higher than regional brands (Speedway, Thornton's, 7 Elevens, etc) regardless of the above factors.

 

The money on gas may be made at the wholesaler level of by the middle man, but it is not made at the retail level. Margins are held low and convenience stores are what bring in the cash. Low margins create the traffic, sodas, oil, fast food, etc make the $$.

 

Wow thanks for the great insight. I 100% agree with you on the price being competitive, especially between the discount guys and the legacy guys. One thing I have noticed that the usual few cents cheaper by speedway, thorntons, etc is dissapearing the higher retail prices get. There seems to less room for error in the prices, meaning more volatility. Where I live we have at the corner of Pulaski and Vollmer a Speedway station for years, selling discount gasoline. About 3-4 years ago a BP station went in across the street. While gas prices were still $2.20 they speedway was always a few cents cheaper, but since the price has gone up the price discrepancy is gone. The speedway and BP price is usually always the same now, more reflective of the BP price than the speedway price. The same situation is true of 183rd and Kedzie. We have always had a Shell and Citgo on that corner. Then a couple years ago the Jewel there decided to put in a station and sell discounted gas, the station is even called "econo gas". Same situation, a few years ago they would always be a few cents cheaper than the other guys on the corner. Now with high prices, everyone is priced the same, no few cents cheaper anymore. Now that seems like gauging on the outside, but Im not sure. It could just be variances and tight supplies or volatility in demand from the high prices. But it is definatly interesting to note that gas prices have gone retarded. I live in homewood-flossmoor. We have $4.25 on Vollmer Rd, $4.19 on 183rd St, $4.11 on halsted st, and when I went golfing at waters edge there was $4.07 at Harlem and 115th st. Whats weird is that now gas is cheaper on the I-294 oasis , $4.21 yesterday, and the shell station by US Cellular on 31st st at $4.21 as well. Thats cheaper than many locations around my house. Which is tentatively insane since oasis and chicago gas prices have historically been 10-20 cents more than the suburbs. Crazy price volatility like I said, seems fishy to a lot of people.

Edited June 14, 2008 by joeynach

[Cerbaho-WG]

Well, the taxes on a gallon are pretty outrageous already, im sure prices will continue to climb and stay high since everyone is still buying gas.

 

No, they're not. Plus, domestic demand has little to do with the price of gas. If you're looking for a culprit behind high gas prices, the evidence lies with OPEC and increased foreign demand from China, India and Russia.

[joeynach]

No, they're not. Plus, domestic demand has little to do with the price of gas. If you're looking for a culprit behind high gas prices, the evidence lies with OPEC and increased foreign demand from China, India and Russia.

 

I think gas prices in China and Russia around $3 per gallon. So how do they have cheaper gas when their demand is through the roof. Cant be all taxes b/c we know that we dont tax gas $1 per gallon, we tax gas like 20-30 cents a gallon. So either American gas companies have artificially inflated the price from the wholesale cost, or somehow China and Russia have sweetheart deals on oil that we dont. Either way it blows. Here is the current price of gasoline futures, its at $3.46 per gallon. Thats the price the oil companies can pay for wholesale gasoline right now. So that means most of the country is seeing a mark up of about 60 cents, and Chicagoan's are seeing a mark up of about 80 cents. Does anyone else find that strange, not the part about Chicago being more expensive but about the mark ups. Why can the oil companies mark up gasoline so much while the economy, other gas dependent industries, and Americans suffer. Why cant the mark up be 20-30 cents a gallon instead of 60-80 cents. Why should this be unregulated when so many people, jobs, and industries depend on it. I know it sounds un-capitalistic to "intervene" here, but this situation is unique. Your talking about an inelastic product (gasoline) which also influences other inelastic products (food prices) that people depend upon to survive. Like I was saying before...seems fishy.

[Balta1701]

I think gas prices in China and Russia around $3 per gallon. So how do they have cheaper gas when their demand is through the roof. Cant be all taxes b/c we know that we dont tax gas $1 per gallon, we tax gas like 20-30 cents a gallon. So either American gas companies have artificially inflated the price from the wholesale cost, or somehow China and Russia have sweetheart deals on oil that we dont. Either way it blows.

You're missing the one other option...the Chinese government, like the governments covering roughly half the people on the earth, subsidize the cost of gasoline purchased by their population. This of course has the net result of driving up demand artificially in those countries, insulating the people from price spikes, and leaving the parts of the earth without major subsidies stuck having to deal with explosive demand growth in the areas that do have them.

About half of humanity, from India to Chile, now benefits from cut-rate petroleum prices. In 2008, these countries will account for all the growth in world oil demand, or an additional one million barrels a day, according to Deutsche Bank. Their consumption will be the highest in eight years.

 

And these subsidies will cost as much as $100 billion in 2008, or twice as much as last year, estimates the International Energy Agency. That would be money better spent on reducing oil use – what's called "demand erosion" – than encouraging it. And sadly, it is the rich who benefit the most. The IMF says the top one-fifth of households in income receive 42 percent of fuel subsidies because they are the heaviest users.

...

In China, oil demand is estimated to rise 5 to 10 percent this year, but the government has resisted calls to end price controls. A few other countries – Chile and South Korea – are now moving toward subsidies to appease political pressures.

 

The biggest culprits are oil exporting nations, especially in the Gulf. They continue to throw petrodollars at both fuel subsidies and big projects that consume oil.

 

In Europe, political pressures are building to reduce fuel taxes, similar to a call by John McCain to suspend the federal gas tax for the summer. Such moves would be a mistake. Fuel taxes help send the right price signals for conserving oil as well as reducing greenhouse gases that cause climate change.

 

In Congress, bills to combat global warming would raise costs for oil users, even possibly adding a dollar to gasoline prices. But proposals by lawmakers to relieve those costs with subsidies to consumers would only defeat the purpose of reducing oil demand.

[southsider2k5]

I think gas prices in China and Russia around $3 per gallon. So how do they have cheaper gas when their demand is through the roof. Cant be all taxes b/c we know that we dont tax gas $1 per gallon, we tax gas like 20-30 cents a gallon. So either American gas companies have artificially inflated the price from the wholesale cost, or somehow China and Russia have sweetheart deals on oil that we dont. Either way it blows. Here is the current price of gasoline futures, its at $3.46 per gallon. Thats the price the oil companies can pay for wholesale gasoline right now. So that means most of the country is seeing a mark up of about 60 cents, and Chicagoan's are seeing a mark up of about 80 cents. Does anyone else find that strange, not the part about Chicago being more expensive but about the mark ups. Why can the oil companies mark up gasoline so much while the economy, other gas dependent industries, and Americans suffer. Why cant the mark up be 20-30 cents a gallon instead of 60-80 cents. Why should this be unregulated when so many people, jobs, and industries depend on it. I know it sounds un-capitalistic to "intervene" here, but this situation is unique. Your talking about an inelastic product (gasoline) which also influences other inelastic products (food prices) that people depend upon to survive. Like I was saying before...seems fishy.

 

That mark up is almost entirely taxes. The futures price is sans local, state, and federal taxes. In Indiana our # is 52.4 cents per gallon of tax, and last I looked we were at $4.03 a gallon, so that is a whole 5 cent mark up.

[RockRaines]

No, they're not. Plus, domestic demand has little to do with the price of gas. If you're looking for a culprit behind high gas prices, the evidence lies with OPEC and increased foreign demand from China, India and Russia.

Its not? You really think the government deserves almost a dollar worth of taxes per gallon?

[southsider2k5]

Its not? You really think the government deserves almost a dollar worth of taxes per gallon?

 

That depends, do you think we deserve to have roads, bridges, and other infrastructure?

[Balta1701]

That depends, do you think we deserve to have roads, bridges, and other infrastructure?

No. Build more rail lines!

[RockRaines]

That depends, do you think we deserve to have roads, bridges, and other infrastructure?

I thought that money was coming from the overpriced tolls that we pay on the highway every day? Or the 3 dollars of tax on cigarettes people pay? Or the 10 percent sales tax i pay when i purchase anything in chicago?

[southsider2k5]

I thought that money was coming from the overpriced tolls that we pay on the highway every day? Or the 3 dollars of tax on cigarettes people pay? Or the 10 percent sales tax i pay when i purchase anything in chicago?

 

Gasoline taxes are specifically for roads and the ilk.

[Balta1701]

Gasoline taxes are specifically for roads and the ilk.

And this country has an awful lot of automobile infrastructure to maintain and improve.

[TheBlackSox8]

i saw somewhere that gallon of gas in 1947 was around 27 cents. A quarter basically. A quarter in 1947 was made from fine silver.....a 1/4 ounce of silver....which was approximately worth $4.20 roughly. So in essence we're paying around the same amount for gas now as we were back in 1947. Gas isn't really getting more expensive, the value of the dollar is getting really damn low.

[Rex Kickass]

Most gas stations in the midwest are making less than five cents per gallon on gas. Many stations are actually taking a small loss of one or two cents per gallon of gas to be competitive. When I worked in radio in northern Michigan, we had independent gas stations as clients. Our best one was the most expensive. The reason? He refused to make less than two cents per gallon of gas. Any gouging that might be done, is not done at the retail level.

 

And, just to let you know at a 2 cent per gallon markup, for every ten gallons of gas stolen in a drive-off at $4.00 a gallon means that to make up the loss, your neighborhood gas station would have to sell an additional 2000 gallons of gas.

[Rex Hudler]

I thought that money was coming from the overpriced tolls that we pay on the highway every day? Or the 3 dollars of tax on cigarettes people pay? Or the 10 percent sales tax i pay when i purchase anything in chicago?

 

You could always try Canada or Mexico if you don't like the taxes here. Choose between higher taxes or s***ty living conditions.

 

Or you could hang out in Europe where gas is $5-$6 a gallon?

 

Just a thought

[joeynach]

Gasoline subsidies from the Gov't, like in China and Russia, suck balls. They dont expose the citizens of those countries to the real economically derived price of gasoline. Therefore they inflate demand due to the cheaper prices the civilian pays underneath his government subsidized price. This on a small scale, a country here, a country there, should do nothing to global prices and/or supply and demand. However, since China and Russia represent about 1/5 of the worlds population their subsidized price and non-exposure to supply/demand economics has in essence screwed up the price for everyone else. Its like squeezing on a balloon, shrinking one end while inflating the other. When prices rise demand should fall back, and vice versa. So in Russia and China as prices rise, demand does not fall back, it can actually increase. Shrinking supplies for everyone else and screwing up the demand/supply balance for the world market. Not to mention China's massive rise in middle class wealth and demand for oil. So basically since we play by the rules of economics (innate to capitalistic societies), we get screwed by China and Russia's subsidized gas BS. I guess this proves we should produce our own gas and not rely as much on global market and imports. Strike another victory to those that want to open up the entire North Alaskan slope for oil drilling or dig out Mountains in Colorado for oil shale.

Edited June 18, 2008 by joeynach

[southsider2k5]

Gasoline subsidies from the Gov't, like in China and Russia, suck balls. They dont expose the citizens of those countries to the real economically derived price of gasoline. Therefore they inflate demand due to the cheaper prices the civilian pays underneath his government subsidized price. This on a small scale, a country here, a country there, should do nothing to global prices and/or supply and demand. However, since China and Russia represent about 1/5 of the worlds population their subsidized price and non-exposure to supply/demand economics has in essence screwed up the price for everyone else. Its like squeezing on a balloon, shrinking one end while inflating the other. When prices rise demand should fall back, and vice versa. So in Russia and China as prices rise, demand does not fall back, it can actually increase. Shrinking supplies for everyone else and screwing up the demand/supply balance for the world market. Not to mention China's massive rise in middle class wealth and demand for oil. So basically since we play by the rules of economics (innate to capitalistic societies), we get screwed by China and Russia's subsidized gas BS. I guess this proves we should produce our own gas and not rely as much on global market and imports. Strike another victory to those that want to open up the entire North Alaskan slope for oil drilling or dig out Mountains in Colorado for oil shale.

 

China's economy can't sustain what it is doing. The money they take in is dollars. They are also a net commodity importer to make their economy go, and a net food importer, both of which are at record prices. On top of that their subsidy based government is putting out way more money now with the increases in the prices of everything. China's economy is going to take a Soviet Union or Japan in the late 80's type tumble. Mark my words.

[RockRaines]

You could always try Canada or Mexico if you don't like the taxes here. Choose between higher taxes or s***ty living conditions.

 

Or you could hang out in Europe where gas is $5-$6 a gallon?

 

Just a thought

Or another city really.