Monday, October 3, 2005

Today, a bit of an essay. Let’s face it, the last three months have been tough on consumers. On July 5, gas was $2.19 a gallon, and that week was the first week in my memory that featured two price hikes and a Friday price hike. It hasn’t gotten any easier since, on consumers or predictors.One piece of the puzzle that I have been thinking about is what has changed, and hasn’t changed, since I started tracking prices in 2001. Back then, gas was half the price it is now, and I used a little algebra to determine that when a price hike occurs, the gas stations are resetting their profit margin to about 20 cents a gallon. As a percentage back then, 20 cents was about 15%. These days, 20 cents is about 7%. Since businesses like to focus on their margins as a percentage of revenue, the gas station owners can’t be that happy, either.

So, who is happy? Probably the refiners and the oil companies. And the traders on NYMEX, who have been moving prices all over the place. Because prices are higher, the swings are larger, too. So, wholesale prices can change by 20 cents in a day, while five years ago, they wouldn’t.

These price swings — large in cents, but not so large in percents — which have emerged as gas has held above $2.25 are leading to more frequent ups and down at the gas pumps, which is making everyone upset. We know consumers are upset, but I also hear from gas stations small business owners, and they are upset, too.

We may be going through a significant change right now in the retail gasoline market. If gas remains above $2.25 for a few more months and these wholesale price swings continue, Speedway and others may seek new ways to manage their prices. This could be a change from a 20-cent margin to a 40-cent margin. Or a daily price reset based on the previous days wholesale price. Or a pledge from stations to hold prices stable for a week at a time. I really don’t know.

What I do know is that based on NYMEX price right now, the 20-cent margin price would be $2.94, which is pretty much where we are at in town after Friday’s price hike. So, prediction time: no price hike tomorrow, and I doubt there will be one on Wednesday. We’ll check in again on Wednesday to see about Thursday and Friday.

No price hike so far this week, so the prediction was CORRECT, although not terribly impressive.

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