Thursday, July 3, 2014

Why do gas prices keep rising?

There is a fundamental question that you hear over and over this time of year, that has to do with how much it costs to get from point “A” to point “B” in your car. Unfortunately, while this is a common question that gets asked, and often answered by nightly news reporters, economists, and even your dad, it’s sometimes difficult to make heads or tails of what those prices you see posted at your local gas station mean. After all, you might see a lower price at station “A” one day, and then a higher price than the gas station next door the very next day. What does it all mean? Unfortunately, the answer is as complicated as you think it is. There’s just no easy way to explain it and deal with it, but still, here goes:

Gasoline starts as crude oil, pumped from the ground, usually in disputed regions of the middle east, but there is also crude oil in the ground everywhere, so that’s really just a question of how economical it is to remove it from the ground. Since there’s so much in the middle east, that’s typically where the crude oil comes from. This is also the first stage of supply and demand, and effects the commodities markets. For instance, let’s say that Saudi Arabia pumps 10 million barrels of oil out of the ground, and then offers it up for sale. The countries that might demand it include the United States, China, Russia, Europe and Africa. Let’s say that the US wants 3 million barrels, China wants 4 million barrels, and the rest want 6 million barrels. “Wait,” you may be saying, “That’s 13 million barrels! There’s only 10 million total.” That means that whoever is willing to pay the highest price for the crude oil is going to be the one who gets what they need. This is the simple way of showing how demand influences price. That’s why you see fluctuations in the price of crude oil on a day to day basis, and the reason so many commodities brokers are millionaires. It’s hard for the price of a diminishing supply product to go down. For the most part, it just rises.

The next step, of course, is refining, and this is where most of the additional cost goes into the production of gasoline. Every country has environmental regulations that have to be adhered to, and at the same time, there are the standard production costs, employee wages, and a host of other expenses that are incurred. 

Finally, the gas stations come into play. You’ve probably heard over and over that station owners don’t make money on the sale of gasoline, but this is simply not true. While they may not make enough to buy a new Lamborghini on the sale of their gas, it is their bread and butter, and until the independent station owners make their balance sheets public, don’t believe them when they say they’re innocent! Gas stations get their fuel from the same refiners and distributors in various geographic regions throughout the country. They then add their own detergents and additives to the fuel to draw customers from other stations. Simply stated, two gas stations situated next to one another are selling the same gas. The one that’s selling it at a higher price is making more money. That’s why you see big gas stations like Sheets, QT and Racetrack selling at prices that are typically lower than others: They aren’t making as much on the gas, but are drawing people into their stations with the prices, and then upselling customers on coffee, breakfast pastries, and bottled drinks. 

You’ll often see different prices in different areas, but this is just another aspect of supply and demand. Stations closer to highways charge more because they can, and drivers may not want to wander too far from the highway to save ten cents per gallon. Gas is more expensive in the cities because fewer people use much gas when they can walk from place to place, and it’s more expensive in affluent areas simply because it can be. That, in a nutshell, is all you need to know about gas prices, and why you’re not saving money at the gas pump!

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