ALEXANDRIA, Va.-Gas prices continue to fall, with the average U.S. retail gasoline price at $4.47 per gallon – the first time in nine weeks the average price has been below 4 $.50, depending AAA. Prices are falling due to a drop in demand and the drop in the world price of oil.
“Headwinds in the global economy are pushing oil prices lower and cheaper oil is driving lower prices at the pump,” said AAA spokesman Andrew Gross. “And here at home, people are filling up less, despite it being the peak of the traditional summer driving season. These two key factors are behind the recent drop in prices at the pump.
According to new data from the Energy Information Administration (EIA), gas demand fell from 9.41 million barrels per day to 8.06 million barrels per day last week, while total national gas inventories increased by 5.8 million barrels. Lower demand and lower oil prices have helped to lower prices at the pump.
The reason for lower gasoline prices seems simple enough, but the fuel market is much more complex, and many consumers don’t understand the whole story of how gasoline prices are set. It is a common misconception that if the price of oil drops, gasoline prices should follow immediately. Although fuel retailers know this is not the case, they are often criticized for not lowering the price of gasoline quickly enough and for making excessive profits on fuel.
The National exam reports that “the idea that gas station owners are some kind of mighty titans of industry, rolling in cash while we languish, is nonsense”. Fuel retailers also don’t like high gasoline prices – they deter customers from shopping in stores, where the highest profit margins are, not fuel sales.
When crude oil prices rise, small businesses do their best to slowly raise prices at the pump so customers keep buying fuel and hopefully walk into the store to make a purchase.
“We really want to have and market a really aggressive price on the street,” Lonnie McQuirter, owner of 36 Lyn Refuel Station, an independent gas station and convenience store in Minneapolis, told The Wall Street Journal in a recent article.
A NACS survey found that high gas prices are weighing on sales at convenience stores, with 59% of retailers saying their customer traffic has declined in stores over the past three months. Nearly half of all retailers (49%) also say customers entering the store are buying less than three months ago, when gas prices were $1.50 a gallon lower.
In addition to the low fuel markups typically charged on fuel purchases, retailers are grappling with credit card swipe fees, which rose 25.6% in 2021. The fees are costing convenience retailers a total of $13.5 billion.
Fuel retailers are also now caught up in a political debate over how to reduce inflation. President Biden, who has accused oil companies and refiners of profiting from soaring gasoline prices, tweeted that gas station owners need to “lower the price you charge at the pump to reflect the cost you you are paying for the product”.
The president also recently tweeted a graph showing West Texas Intermediate and gasoline price changes over the past month with the text: “Time for gasoline retailers to pass on the lower costs they feel in the marketplace on American families at the pumps.”
“Gas station owners may make a convenient scapegoat for the pain Americans are feeling at the pump, but they’re not the real problem,” writes the National Review.
The national review indicates that many markets are characterized by what is known as asymmetric price transmission, or “rockets and feathers”, meaning that when input prices rise, consumer prices rise rapidly, but when input prices fall, consumer prices fall more slowly. The fuel market is one such market. The “why” of asymmetric price transmission is not so clear, and there is no obvious reason in basic price theory why asymmetric price transmission should occur.
Although there are several theories as to why the rockets and feathers occur, “the reason for the phenomenon is of secondary concern in this context,” writes the National Review. “The bottom line is that it’s a very big, complicated market out there, and Biden has done the world a disservice by pretending otherwise.”
NACS wrote a blog post on how to explain to customers why gas prices don’t go down faster when the price of crude oil does.