Gas prices: not so simple as some insist.

Why do gas prices go up fast but settle slowly? Bob Sullivan takes a look at the issue. He notes that gas prices make for an excellent economic laboratory because of their volatility and the widespread consumer reporting of price on websites like GasBuddy. What he finds is that the price of gas is not so simple as some of the politicians try to assert by blaming it on some chosen evil villain.

Any study of retail gas prices risks ignoring complex factors in a market that is anything but pure: The spot price is controlled by speculators making bets on the whims of the oil producing nations’ cartel, the threat posed by government-subsidized energy alternatives and the likelihood of another environmental disaster, to name a few. A mysterious wholesaling and distribution system adds to the cost in difficult-to-measure ways. Also, gas stations often make very thin margins on retail gas sales – many use gas as a loss leader for chips and soda sales. As prices go up, their razor-thin margins shrink toward zero, Lewis said – and station owners naturally try to recover some of those lost profits as prices head back down.

Making the issue even murkier, behavioral economists will tell you, is the fact that gas shoppers are anything but rational agents who constantly seek out the best price. Instead, many are pesky realists for whom the nearest station will do. On the other hand, some consumers overestimate the true value of a cheaper gallon of gas, because they underestimate the cost of driving to get that cheaper gas (what economists call “search costs”).

All goes well until the end of the story where the author’s ideology surfaces

If there is a general lack of price sensitivity when prices fall, basic supply and demand just took another body blow, and comparison shopping just isn’t what we thought it was.

There is no body blow to supply and demand if the consumer is ‘conditioned’ and fails to exercise discretion as the story suggests. That phenomena only shows that supply is not a simple thing as consumers have many factors that enter into their decisions.

The data show that retailers respond rapidly to wholesale costs but are a bit slower when it comes to competition. The impact of wholesale costs on profit are direct and immediate and clearly defined. The competition incentive is slower because it is consumer driven and a much more complex phenomena. That is why gas prices respond quickly to supply costs going up but more slowly to competition going down. Nothing mysterious; no conspiracies; no evil greedy manipulators out to steal money from the poor; just a market working its way through many different phenomena.

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