Q&A of the Day – Gas Price Cycling? What’s Behind the Recent Rise?
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
Social: @brianmuddradio
iHeartRadio: Use the Talkback feature – the microphone button on our station page in the iHeart app.
Today’s entry: Gas price cycling has been going on for months here in PBC. Gas was as low as $2.75 Sunday and today prices are $3.29. You used to be able to track gas prices by looking at oil prices. The last several months have seen the rollercoaster pricing. Greed? Any thoughts? Thanks.
Bottom Line: We have seen a spike in gas prices this week after having seen just the opposite in the previous week. The yoyo effect in prices at the pump do seem curious at times. I can’t speak to what you’re citing as prices having risen from $2.75 to $3.29 (perhaps that was one gas station with specific circumstances you’re referring to?). While we did see a significant increase this week, the average statewide was only a difference of 19 cents rather than a change of greater than 50 cents. Within Palm Beach County specifically that held as well where the widest increase top to bottom has been slightly lower at 18 cents per gallon over the past week.
Before diving into the local nuiasances let’s first breakdown the big picture cost of what we’re paying for when we buy a gallon of gas. It's dynamic based on the variances in the cost of oil and refining at any given time.
Here’s the most recent breakdown via the US Energy Information Administration:
- 52% - oil
- 17% - taxes
- 16% - refining
- 15% - distribution & retail marketing/margin
We tend to think of oil being the end all be all when it comes to the cost of what we pay at the pump, however as illustrated, while it’s the biggest driver of cost – it’s still only about half of the equation. One of the key variables that’s acted independent of oil prices most recently is seasonality. September 15th is the last day that the EPA mandates the summer blend of fuel be used by gas stations. As a result, refineries begin to be taken offline in advance of that date to recalibrate and reformulate to the winter blend of fuel. Complicating the transition, a significant BP refinery in Indiana, was offline for an extended period due to extensive weather induced flood damage. Based on the level of demand for gas timed with reduced refining capacity during the transition, it’s possible for the cost of refined gas to head higher. Demand has remained steady and that appears to have been a small factor.
As for the practice of cycling, it is very much a thing. It’s not uncommon for certain gas station owners to reduce prices in an effort to attract more customers. Often when one gas station dips in price others competing with the station will try to remain competitive with that price. That can and often does create a cycling effect that often plays out later in the week and through the weekend. A related fun fact. On average the best time during the week to buy gas is Monday morning. The worst days of the week to buy gas are Wednesday and Thursday.
As for the potential for the “greed” factor. There’s so much competition in almost all situations it’s hard for a gas station to gouge and get away with it while maintaining a healthy flow of customers. The average net profit margin on a gallon of gas monitored most recently has ranged from 1 cent per gallon to 3 cents per gallon. Even at three cents per gallon that’s far from something akin to greed. The key to most gas station profits isn’t the gas. It’s what’s sold in convenience stores or car washes, etc. where margins average over 30%. The need to drive traffic to their stores helps with price competitiveness on gas and at times during competitive cycling, some stations will drop prices to or even below cost to attempt to keep the traffic coming into their stores.
Now the good news is that with the winter blend of fuel process underway, we’ll soon see lower prices at the pump from that process alone which average being 12 cents cheaper per gallon to refine than the summer blend of fuel.