Gas prices.

[flamin lib]

This isn't flame bait and isn't an endorsement of any retail practice, just an explanation of why prices spike immediately and take so long to come back down.

Suppose you are a gas station owner and have 50,000 gallons of regular that you paid $2.00/gallon for. Wholesale for your next delivery goes up to $2.25/gallon. In order to buy that next delivery you must immediately raise the price on your existing inventory to cover the cost of replacement.

Now you have 50,000 gallons that cost you $2.25/gallon. Wholesale price drops to $2.00/gallon for the next delivery. You can't afford to sell existing inventory for less than cost, so the new lower price will not go into the pump until all existing inventory is used up.

Keep in mind that there are a number of links in the delivery chain, so the reduction in price is slowed greatly compared to the immediate spike.

Does this result in a windfall for the retailer? In some cases yes, in others not. Prices are set by the shortest supply chain. Retail competition drives prices down, so if your supply of expensive gas is too large it has to be sold at below cost when your competition gets the new delivery before you exhaust your inventory.

[mike_c]

1. sorry-- I don't buy that explanation....

It assumes that businesses should not accept the risk of doing business in a market economy. Marking up existing inventory-- in effect inflating one's profit in anticipation of future costs-- passes the risk to consumers, who pay the FUTURE costs of the business owner as well as the current costs.

[flamin lib]

4. Hey, I didn't say the consumer wouldn't carry the burden, I just

told you how the retail system deals with spikes in supply pricing.

Nowhere did I say anyone had to like it.

[William769]

2. Let me have some of what your smoking.

[flamin lib]

10. Got nothing to do with recreational pharmacology. Simply an

explanation of retail pricing. Applies to wholesale too all along the supply chain.

I'm open to other suggestions to explain the phenomenon so widely noted here an elsewhere.

[firefox]

3. It is the wholesale price you should talk about

There are hundreds of stations any individual could buy from, but there are only a handful of suppliers and it is the wholesale price that is most important and not the markup which faces stiff competition.

[flamin lib]

5. I said there were many links in the supply chain. The practice takes

place at all levels of supply. The higher up the food chain you go, the more likely there will be a windfall.

I don't particularly like it either, it just is what it is.

[rkc3]

6. Sounds reasonable to me, but if this truly were a market-driven

commodity - the price of gas would be far higher than it it right now.

Because of the high switching costs associated with our preferred mode of transit - it's not easy to work closer to home, move closer to work, buy a more fuel efficient car, or take public transit - people will continue a high rate of consumption over the short term.

So the gas companies have us over a barrel. They could afford to create spikes in prices any time they wish and there would be no long-term problems. Only when we see high gas prices for an extended period of time will we see consumption go down.

That's been the problem faced by OPEC for years. They've wanted to keep the price of oil low so that consumers don't look for alternative sources of energy. Now things have changed, they, along with the BFEE, recognize it's far too difficult to start over with a new energy source (plus there are concerns over bush's Iraq war) and prices have gone up considerably.

And consumption remains high and is growing.

[flamin lib]

8. Very good observations, rkc. nt

[berni_mccoy]

7. Gas prices go up for one simple reason:

People are willing to pay for it and demand keeps going up.

That's it.

It's not complicated.

Until people CAN NOT AFFORD gasoline, gas prices will continue to go up.

When enough people can't afford to fill their cars with gasoline in order to go to work, there will be a reduction or stabilization of the price. Until then, it will keep going up and up.

[flamin lib]

9. Sure, it's simple supply & demand. That, however is outside the

scope of the OP which was about why prices go up immediately and come down slowly.

[berni_mccoy]

16. It has everything to do with the OP.

Supply is staying steady (or in event of disaster decreasing) and demand is continually increasing. That's why gas goes up quickly but does not come back down.

[flamin lib]

18. You may argue, and I would offer no opposition, that petro prices

trend up and never return to the original price from short term spikes. However short term price fluctuations follow supply pressures. Regular here went from $2.60 to a high of $3.10. It is currently at $2.74.

[berni_mccoy]

21. Excellent point.

If that series of prices was between Katrina and now (2 weeks)... I wonder without Katrina, how long it would have taken gas to go from $2.60 to $2.74 just going on global supply/demand factors...

If you are saying that events like Katrina act as localized accelerators to the normal trend, I would agree 100%.

[mermaid]

14. Yes. And The Poor Will Be Fucked Over Again!! n/t

nt

[HamdenRice]

11. Full of logical and factual errors

1. First a factual error. Most retailers do not pay cash for inventory. They finance it, using instruments as varied as commercial paper or purchase money lending. In other words, the gas station does not need to come up with $100,000 cash to buy gas wholesale. If that were the case, there would be precious few gas stations. Either the wholesaler lends them the gas, with interest, which is paid back in installments as the gas is sold, or the gas station owner uses a line of credit from the bank with the bank taking a security interest in the inventory.

Either way, this enables the retailer to sell the gas in inventory in your hypo at the $2./gal he paid for it without worrying about "raising cash" for the next purchase.

2. Second a logical error. Even if the facts in your hypo were true, and the retailer had to "save" cash by charging 2.25 for 2., then when he took delivery of 2.25 gas, he would have a cushion of .25 per gal, for when the price dropped. Gas is fungible. He does not have 2.25 gas in inventory; he has gas in inventory.

If the markets are competitive, then price competition should cause him to drop the price immediately.

[flamin lib]

15. Sorry, Ham, but logic has nothing to do with it. It is retail practice.

Pure, simple, pricing practice that takes place in today's business environment. That is factual logic aside.

Never said I liked it. Just explaining why prices go up immediately and down slowly.

If you noticed I did say that the price is set by the shortest supply chain. If the competition drops pricing to reflect cheaper supply other suppliers must do so as well regardless of cost of inventory.

[HamdenRice]

20. I can understand your explanation as a pricing practice ...

but just not the math. As others have pointed out, the retailer's purchase of inventory is financed, not paid in cash. So he does not have to save up to make the next purchase.

Sorry if I sounded harsh.

[flamin lib]

23. No apology necessary. Math, logic, whatever has nothing to do

with the phenomenom. It exists.

Call it an excuse, call it gouging, call it what you will. It happens and that is the rationale for it at all levels of supply chain.

[Heewack]

12. You are exactly correct.

Had a friend that owned a convenience store with gas pumps, and I don't thnk he could have described it any more succinctly.

[HamdenRice]

19. who's correct?

the way this is threaded I can't tell who's description conforms to that of your friend?

[spinbaby]

13. It's my understanding

That gas station owners don't actually own the gas in their own tanks. It belongs to the supplier until the moment it's sold and the supplier can change prices at a whim.

[flamin lib]

17. I believe you are correct. Many big ticket items are handled that way.

In the automotive industry it's called floor planing I think. Still the principal holds true all along the supply chain.

This is why JIT (just in time) and other wholesale practices have become so common place. Anything that shortens the delivery time or reduces the inventory burden decreases the possibility of having obsolete product, either price wise or trend wise.

[Berserker]

22. I don't think so

If a gas station owner buys 50,000 gal of fuel for $2.00 a gal and price goes up .30 in one night he not only makes the usual profit but also the .30 on top of that per gal. Name one station that waits to raise the price until he sells all the fuel he is setting on because he got it cheaper. NONE
Now tell me one station that lowers his price until the fuel he bought is gone? NONE.
So to say he needs the extra money to buy the next load will not cut it for and excuse. He makes his margin off that load also.
I know I used to own one.

[flamin lib]

24. I don't see where we are at odds. I never said it made sense or

was logic based. It happens and that's the reasoning behind it, true or not.

There is the possibility for loss if the "expensive" inventory is too large. You can't sell gas at $3.10 if everybody else is at $2.74. Best case here is a break even because of the windfall on the first price increase.