Why aren’t gas prices lower?

Tuesday, October 21, 2008, 9:20 AM:  The following question has been posed to me several times the past month:  On July 15, oil was at $145 a barrel, and gasoline cost $4.25 a gallon at the pump in Grand Rapids.  Last week, oil was $72 a barrel, and gasoline cost $2.96 a gallon.  If the price of oil has been cut in half, why hasn’t the price of gas followed suit?

There are a few reasons for this, that I will try to explain.

1.  NYMEX.  Oil and gasoline futures are traded on the NYMEX, a public market with prices available for all to see.  The price of these future contracts helps set what is called the “spot” price, which is what is actually charged when real oil or gasoline changes hands at the wholesale level.  Sales and other taxes are not included in the NYMEX prices.  Looking at these futures prices, both oil and gasoline has dropped approximately 50%, so at least at the NYMEX level, these prices are correlated.

2.  Taxes.  There are three taxes applied to the wholesale price:  the federal gas tax of 18.4 cents per gallon, the state gas tax of 19 cents per gallon, and the sales tax of 6%.  So, that’s at least 50 cents of the retail price that is taxes, regardless of the wholesale price (except for the sales tax, of course).  In the past three months, those taxes have not been cut in half, so it would be hard for the retail price to drop 50%.

3.  Chicago Summer Premium.  I coined this term a few years ago to describe how, during the summer months, the wholesale price in the Midwest is usually higher than the price based on NYMEX.  The reasons for this have to do with reformulated gasoline, variations in supply and demand, and some other mysteries I’ve never solved.  A way to monitor this premium is to look at the wholesale numbers for selected Midwest cities that are posted on AXXIS.  The NYMEX/AXXIS difference was 20 cents on July 15, over a dollar in mid-September when Hurricane Ike struck, and is currently still 41 cents.  The AXXIS price has not dropped in half the past three months, and this may still be a hangover from the hurricanes.  It is also the first place I would look for gas gouging if I was the Attorney General.

4.  The Dynamics of the Retail Market.  As a journalist said to me last week, “Up like a rocket, down like a feather.”  We’ve documented time and again on this site how this works, with the big price hikes followed by the gentle day-to-day drops, while the wholesale price fluctuates in the background.  Our last price hike was during the September 12-14 weekend, when prices got up to $4.29 on 28th street.  Since then, the drops have been slow but sure — some days one or two cents, other days seven or eight cents.  In an area where there are several stations, one station decides to drop their prices a few cents because a cheaper shipment came in that day, and the other stations follow suit.  The point is that the retailers aren’t setting their prices based on trading on NYMEX.  They are setting it based on their costs, what their competitors are doing, and what sort of business they are getting.  Are the retailers making extra money right now?  I doubt it, as our monitoring indicates they are still dealing with high wholesale prices in the Midwest, and some of the gas in their tanks cost them $2.95 a gallon last week.  But prices continue to fall, slowly but surely.

All this leads to my latest prediction:  It looks to me like the chaos on Wall Street is dissipating, so energy prices are starting to stabilize.  I expect Speedway and friends will decide it is time to straighten up their prices, with a reset by the end of the week to $2.89.

5 Comments

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  1. Gas over here in Ann Arbor at the most expensive gas stations is already $2.89. I filled up at a good station for $2.79 this past weekend, I’m sure it is down in the 60’s now.

  2. Gas has hit the $2.60s at both the lakeshore and near Lansing…do you still think that the price will rise by Friday to $2.89 given the wholesale price taking a 13 cent dip today?

  3. Judging by the drop in the crude price due to the increase in stocks of crude and gasoline today…and the continuing drop in the market, my prediction for the gas price by Christmas is $2.10 a gallon.
    Things keep dropping just like the leaves…and I think in the long run gas will continue to do so.
    My wit and wisdom should be in tomorrows GR Press along this line. I got an interview out of the Grand Rapids Gas Prices.Com website…neat huh!
    And by the way, my predictions are worth just what you paid for to get it…nuthin! But its fun to do.
    Dano in Rockford

  4. Oil down $3.50 on OPECS announcement of a 1.5 million barrel a day reduction in crude output. Gold continues to fall as well as the NYSE. When gas gets to $2 a gallon what good will it be if no one is using it anyway? Gas prices are a double edged sword. Lower is good but is also a sign of a slowing world economy. Gas prices up because of demand by a vibrant world economy? Is that better?
    Oil prices are a harbinger of whats to come be it up or down.
    We shall see what 2009 brings.
    The weird part of all this playing out is gold continues to fall and its usually the ‘safe haven ‘ when things hit the crapper. Go figure that one!

  5. Unfortunately, everything starts underground! The real culprit of the great demise of our housing market, banking, and general output of our economy is controlled by oil prices. With our Justice System(supreme Court) in the pockets of big oil. How can any of this insanity of our current economic condition be corrected. It all starts underground June 7,2008 $139 bbl June 5, 2009 $68 bbl.

    Until big oil is brought under control all else is futile ie, bail outs. Big oil controls opec and all of the real players in the oil business,

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