Prof. Matthew S. Lewis of Ohio State University has written, “Price Leadership and Coordination in Retail Gasoline Markets with Price Cycles“, which will appear in the International Journal of Industrial Organization.  Here is the first half of the abstract of his paper:

This study examines the coordination mechanism used by gasoline stations in the midwestern United States where prices exhibit highly cyclical fluctuations known as Edgeworth cycles.  Stations in these markets repeatedly coordinate large marketwide price increases following periods of aggressive price undercutting. By studying these periodic price jumps both over time and across cities, I find that a particular retail chain in each city acts as a price leader initiating each price restoration. The leader signals the new price level to competitors by simultaneously jumping prices at all its stations to a single price. Competitors follow quickly with a large majority of stations jumping to the exact same price within a 24 hour period.

The “particular retail chain” he refers to for Michigan and nearby states is Speedway.  What a surprise!

The second paper is written by three economists at the Federal Trade Commission — Paul R. Zimmerman, John M. Yun, Christopher T. Taylor.  Here is an excerpt from the abstract for their paper:

Like others who have examined cycling, we show that a relatively small number of U.S. cities in contiguous upper Midwestern states evidence price cycling. However, our lengthy data set allows us to see that these cities began cycling in 2000. Thus, we can examine prices in cycling and non-cycling cites before and after cycling and, controlling for other factors, find prices are lower in cities that began cycling.

The charts in this paper, showing the change in pricing behavior before and after 2000, are compelling.  As we continue our celebration of the 10 years of The Gas Game, we now understand our secret origin — we started gas price hike predictions two years after cycling began in the Midwest.

Message to Prof. Lewis and the FTC writers:  What took you so long to figure all this out?  Why can’t I find a reference to the The Gas Game in either of your papers?  I’m a professor — I know how the credit thing works in academia.  I have priority!  Actually, thanks for providing the statistical proof of what we’ve observed for a long time.

Tuesday, December 6, 2011, 10:51AM:  I thought it was time this morning to figure out where we are at with potential gas prices, but I see that the Speedway web site has posted $3.45 a gallon at some stations, so it is PRICE HIKE DAY. Fill up!  $3.45 seems a bit high given the relationship in the past between wholesale prices and price-hike day prices, but I thought the last hike to $3.35 was a bit much, too.  So, it appears that Speedway is trying to improve their margins.  They have not been successful in the past trying to do this.

Monday, November 21, 2011, 8:15PM:  Energy futures took big drops this past Thursday, so it is a realistic possibility that you will be able to buy gas in the Grand Rapids area for $2.99 by next Monday.  Let’s have fun:  that’s a prediction! –Ed Aboufadel

There are two prices that could be called “wholesale prices”, and the first is available publicly on the Internet in a variety of places, such as here and here . The latter is a better number because it is based out of publicly-traded markets in Chicago, while the former comes from New York. Last night, for instance, that wholesale number was about $2.70 per gallon.  These public markets are where the price of gas is set!

Now, we take that price and add in 18.4 cents for the Federal per gallon gas tax, and another 2.6 cents for miscellaneous charges (e.g. transportation), so that gets us to $2.91. Now, recent communications I have had with a retailer suggests that there is another 10 cents of miscellaneous charges in there to pay for storage, etc., so that gets us to $3.01. This is a second price that could be called a “wholesale price”, and we are getting close to what the retailers pay to buy gas for their stations. Gov. Snyder’s proposal is to apply a percentage tax to one of these wholesale prices instead of a flat 19-cent per gallon state tax, and he says, “I propose we eliminate the current gas tax on consumers” and apply it to producers or retailers instead. He also says that based on current prices, the tax would be revenue neutral. What are the implications of these statements?

Based on current prices (see this spreadsheet for my calculations), a wholesale gas tax of 6.7% on the Chicago price or 6.0% on the price to retailers would be revenue-neutral. For either situation, in our example, the retailer would pay $3.19 a gallon. Then, on a price hike day, you add 10 cents or so profit and the 6% sales tax, and you get a price of $3.49 a gallon, which is what we are paying this morning for gasoline.

So, in terms of “eliminating the current gas tax on consumers”, of course the new wholesale tax would be passed on to the pump price, and we still have the 6% sales tax that we are paying, so I don’t think there is much to that.

In terms of revenue collected, I believe that currently the 19-cent per gallon tax goes to roads while the 6% sales tax goes to the general fund. If the proposal is passed, then the wholesale tax will go to fixing roads. If the price of gasoline goes down, then Michigan will collect less than 19 cents per gallon. If the price goes up, then Michigan will collect more than 19 cents. For example, if the price of gas returns to $4.25 a gallon, then the State would collect 9 more cents per gallon.

Based on past history, during recessions, gas prices fall, so the tax collected per gallon will fall, and during boom times, gas prices rise and the tax collected per gallon will rise. So, the economist in me says that the new wholesale tax will provide the acceptable result of an economic stimulus during poor economic times (by lowering taxes) and a gentle break during great economic times (by raising taxes). Consequently, during economic booms, the State should save a lot of the gas tax money for a rainy-day roads fund, and then spend that money during recessionary times to fix roads and create road construction jobs.

The politician in me sees this as a way to implement a reasonable tax policy without getting into fights every few years about raising or lowering the gas tax. Every few years, politicians won’t have to take the blame for raising the gas tax, or take the credit for lowering it. Gov. Snyder pretty much says this in his speech.

There is another issue here. As automobiles use less gasoline per mile (due to improvements in efficiency and the increasing use of hybrid and electric cars), the gas tax is doomed to collect less total revenue over time, no matter what the price of gas does. I think this is the rationale for raising the annual registration fee — this fee will balance out the loss of tax dollars from the gas tax. What’s funny, though, is that those who drive hybrid and electric cars are and will continue to pay less tax per mile than the people who drive gas-powered vehicles. And it seems that miles driven should be a better way to measure road use than gallons of gas burned. Consequently, perhaps the annual registration fee for hybrids and electric cars should be higher!

Because I am a middle-of-the-road Democrat, I am not going to rant about starving the government and freedom from taxes. In my opinion, the proposal from Gov. Snyder is reasonable starting point for discussion, but I don’t buy the we-are-cutting-consumer-taxes argument. At the same time, I can see why members of his party are not enthusiastic — after raising taxes on citizens and cutting revenues to schools in colleges in order to cut taxes for businesses last year, this proposal could be described as “more new taxes on the citizens of the State”.  At least in this case, though, “revenue for roads” is a trade-off I’m willing to consider (if I was asked). –Ed Aboufadel

Thursday, September 8, 2011, 12:20PM:  Future prices have been bouncing all over the place the past few weeks, and yesterday they bounced up, so today we get a price hike to $3.89.  Boo!  Hiss!  Something I saw on CNBC recently did get me thinking — in April 2008, gas was also $3.89 a gallon, and oil was $118 a barrel.  Today, gas is also $3.89 a gallon, but oil is a bit below $90 a barrel.  So, oil is 25% cheaper than 3+ years ago, but gasoline is the same price.  What’s up with that?  From what I read, it seems that gas prices were, believe it or not, lower than they should have been in 2008, or maybe oil prices were artificially high.  (Thank you, speculators!)  Well, whatever the case, if I can sound like a politician for a moment, “We need to do something about these job-killing price hikes!”

Friday, August 26, 2011, 12:40PM:  The price hike to $3.85 on Wednesday was a bit ridiculous (and unexpected), and the way to judge an overdone hike is to see what happens the next 48 hours.  In this case, some places never went to $3.85, and today we are back in the $3.60′s in several areas around Grand Rapids.  Why the hike?  Wholesale prices did jump a bit earlier in the week (and, I’m troubled to say, again yesterday), it seems like there is a push for higher margins at Speedway and friends this month, and we’ve got some hurricane-related jitters.  An example of these jitters is an unexpected e-mail I received this morning, selling OPIS news alerts, with warnings about east coast refiners that could lead to “turmoil”.  A good time to be contrary is when there is panic in the air.

What I really want to write about today, though, is this front page story in yesterday’s Grand Rapids Press:  Who Knows What Oil Will Do, by Ursula Zerilli.  Part of the article touched on themes we’ve been hammering on this site for years:  volatile futures markets, speculation by investors reflecting a broken market, low profits on gasoline for station owners.  (Refinery owners and big oil companies, on the other hand, are doing just fine.)  But, are you calling out this web site with quotes like this one:  “One thing about predicting gas prices is there is no way to predict.” ?!  It’s true that predicting what prices are going to look like a month from now is pretty tricky (if I were to guess:  lower), and at the moment, we could get a hurricane-fueled price hike on Monday, or not.  August is the trickiest month.  But most of the time, we can make accurate predictions about price hikes and price drops.  As we continue through our 11th year of The Gas Game, we’ll do our best to help you out. –Ed Aboufadel

Thursday, August 18, 2011, 1:50PM:  Yesterday’s price hike was not related to wholesale spike, just someone at Headquarters wanting to get those margins back up again.  As I noted the other day, it looks like we are seeing more aggressive pricing this month to increase margins.  Sorry for the WRONG prediction.  Of course, the day after the hike, we have a harsh decline in the stock market, which means wholesale prices are also falling.  At the moment, the Gasoline ETF with symbol UGA is down 3%, so that would translate to about a 10 cent drop in wholesale prices.  So, retail prices will be down a dime tomorrow, right?  Maybe — I see we are $3.61 in Jenison this afternoon.  The point is there is now pressure on retail prices to go lower the next few days.

Friday, June 24, 10:10AM:  A couple of related items today:

1.  Wholesale oil and gas prices really took a hit yesterday, putting the 0-cent margin price at about $3.30.  With prices way above that number, look for markdowns all weekend.  That’s a prediction!

2.  One big contributor to the drop in prices was Pres. Obama’s decision to release oil from the Strategic Oil Reserve.  While there is debate about whether or not this is a good idea from the point of energy security, in terms of manipulating the market, this was a great move.  Oil was already dropping in price this month, and this was the type of decision that will scare some of the speculators out of oil contracts, which should drop the price further, at least short term.  What Pres. Obama’s administration should do next is then buy back the oil at the cheaper price, which would make money for the taxpayer for once.

3.  In a way, this is all disturbing though.  Here is a nice quote by Robert Prechter (brought to my attention by Peter Atwater) that captures what I have been harping on for quite a while — that the energy markets are broken:  “There is an entirely different pricing dynamic for assets purchased for their fundamental utility value versus assets purchased for their investment potential. When the price of a good or service rises, fewer people buy it, and when its price falls, more people buy it. This response allows pricing to keep supply and demand in balance. In contrast, when the price of an investment rises, more people buy it, and when the price falls, fewer people buy it. This behavior is not an occasional financial market anomaly; it always happens.”  And this is our problem, as oil and gas has become an investment rather than a good.

4.  Which brings us to the news that federal regulators have started a new investigation into whether oil companies and refiners have manipulated markets, raising oil prices to their benefit.  My feeling about this is that they probably are not — that #3 above better explains what is going on. At the same time, because the markets are broken, it wouldn’t be difficult for oil companies and refiners to manipulate the market.  The solution, rather than arrest people for following the rules of a broken game, is to change the rules.  For example:  for any energy futures contract, the product must be delivered at expiration.  That is, if you buy an oil futures contract, you have to buy the oil when the future expires.  That will close the casino!   — Ed Aboufadel

Ten years ago today, on June 1, 2001, is when I stated my daily monitoring of gas prices and NYMEX prices.  By the end of 2001, I had figured out what I needed in order to start making predictions.  In June 2002, the “gas game” essay was published in the Grand Rapids Press, and on June 12, 2002, I started this blog with my first posting.  So, for the next twelve months, we will be celebrating “10 Years of the Gas Game”.  The gas price in Standale on June 1, 2001?  $1.75 a gallon. — Ed Aboufadel