Because I drive a big ass truck filled with delicious snacks, I’m at gas stations a lot. Sometimes when I’m there, I get gas. Other times, I fill up my truck with petroleum products.
See what I did there?
Most of the time when I’m at these gas stations, it’s to fill them up with chips. This means I probably spend an average of a half hour in a couple different gas stations a day. In fact, I might even be the closest you know to a guy who actually pumps gas, since it seems like no gas station actually offers that service anymore. I’m not sure how I feel about this.
Anyhoo, one thing I notice about spending time in gas stations is the default conversations that go on between the person behind the counter and the customer. They either talk about the weather or the price of gas. It never fails. Next time you’re inside paying for gas, pay attention.
One thing I will give the customers credit for is they rarely bitch about the price of gas. I’ve heard a few good stories from gas station employees, but I’ve never witnessed anything more than a passing complaint about what a DAMN RIPOFF GAS IS THESE DAYS. ALSO, TEENAGERS AND TECHNOLOGY PISS ME OFF.
Sorry, got a little sidetracked there.
One thing my Dad likes to complain about is how the price of gasoline always seems to lag the price of oil going down and then lead the price of oil going up. Does this really happen? Or is my Dad just a grumpy and/or senile old bastard? Let’s find out.
First of all, let’s have a look at the relationship between the price of crude oil and the price at the pumps. The website Gas Buddy has some pretty good stuff there. I’m impressed, considering how I thought it would only tell you how to drive 8 miles to save 40 cents on your next tank of gas. CHART ME:
As you can see, there’s a pretty good correlation there, usually when oil goes up the price of gas follows right along. When oil struggled, the price of gasoline also went down, at least most of the time. However, the correlation isn’t perfect. It appears, at least for the most part, the price of gasoline lags the price of oil a little bit.
How does that compare to the price of oil versus the price of gasoline on the ol’ commodities exchange? I’m glad you asked. This time, Bespoke Investment Group is doing all the heavy lifting by creating the chart. First, the price of WTI vs. the price of gasoline:
Okay, there’s definitely correlation there, but what about near the beginning of the chart when oil sold off aggressively and gasoline didn’t? AHA! We found proof of the gouging!
Uh, no. Check out the comparison between gasoline and Brent crude:
Now, admittedly, both these charts only go up to August of last year. Things may have drastically changed from a year ago, but my money is that they haven’t. Because there’s all sorts of reasons why the price of gasoline doesn’t just mirror the price of oil. Let’s talk about them.
Gasoline and Oil are two different commodities that trade separately on the futures market. Sure, one is made from the other, but that’s not the only variable that goes into the equation. Remember Hurricane Katrina in 2005? A bunch of American refineries were damaged in the storm, as well as oil production in the Gulf of Mexico grinding to a halt. Commodity traders speculated shortages were coming, especially in gasoline and diesel fuel, so prices spiked. Prices quickly rose at the pumps too, partially because people clamored to fill their cars before the gas ran out.
Is there really a reason for big oil companies to rip-off their customers? The gasoline business is pretty simple. All the company wants to do is sell gas either to the poor sucker who runs the station or sell it themselves, but at a consistent profit. If they can maintain their margins, they’re happy.
If oil companies were really in collusion with each other, wouldn’t the free market indicate that a smaller, upstart would see this and undercut them? Or, maybe one of the big boys would undercut a little to gain some market share and customer goodwill. This doesn’t happen because each of the oil companies just maintain their margin on gasoline and try to entice customers in different ways – loyalty programs, nice convenience stores, and so forth.
Remember when we looked at price comparisons between the two types of oil? It’s important to note the difference. Brent crude is primarily extracted from the North Sea, but oil produced in most of Europe, Africa and The Middle East is usually clumped in with Brent. It is, essentially, the price that Europe pays for oil.
For the last little while, the price of Brent crude has been consistently higher than the oil we produce in North America, West Texas Intermediate. Why? It turns out we’re flooded with the stuff. Supplies are up, and the crummy economy means we’re not using as much. Europe still has weak demand, but their supplies aren’t as high as ours. So, traders have responded by pricing gasoline much closer to the price of Brent crude, not WTI.
Guess what oil price is quoted every time you watch the news?
There’s one situation where I’m willing to guess there’s a little bit of creative pricing going on. When oil goes down, I’d bet oil companies resist decreasing prices as long as possible. Gas stations will probably have tanks full of more expensive gasoline, so it’s in everyone’s best interest to resist bringing prices down. I couldn’t find any evidence of this happening, but it only makes sense.
So, the next time you think gas stations are intentionally gouging you to increase their profits, give your head a shake. And, like always, if you think it’s such a good business then maybe you should buy some oil company shares. Or, you can figure out the best gas station rewards program (part 1 and part 2) and save some cash that way.