So, Why Is The Price Of Gas Rising Now?
Anne writes:
I just don't get it. Does Consumerist know of a good media source that has a *current* (i.e., in the last week or two) breakdown of why the heck gasoline prices are rising 10 cents a week and more in the last month?
Let's take a stab at some possible reasons.
There are a lot of partial explanations. It's partly due to some refineries cutting production, both to increase profit by reducing supply and to make repairs, at least in California. It's partly due to the crude oil market being in contango, the term for when "the current month’s (Feb.) future price is trading lower than the futures price for the following month"—which means there's a lot of oil being bought and stored in tankers for future sale. (The problem: we don't know how this contango directly translates to higher prices at the pump. Does it create a shortage? Can anyone educate us in laymen's terms?) Oh, it might also partly be due to the temporary spike in crude prices back at the end of 2008, because often pump prices lag crude prices.
Or, gas station owners might be seizing the moment to take advantage of the low price of crude to make the profit they couldn't make last summer:
That's exactly why some stations raised prices quickly after oil futures jumped late last year: not because the more expensive oil had made its way through the production process, but because they saw an opportunity to make some money after struggling with paltry profits for months. So the usual lag between oil and gas prices may not have occurred this time at some stations — they wanted to raise prices, and they didn't feel like waiting.
Quinn Cassidy, an independent gasoline retailer in Slidell, La., said his profit margin on a gallon of gasoline has improved significantly since the summer, when he and others sometimes made pennies per gallon. Now, because of crude's descent, he says he can make 25 cents to 30 cents a gallon — and he makes no apologies for trying to keep the price as high as possible while remaining competitive.
We were hoping to find a simpler, straightforward explanation, but that's the best we could come up with after looking around at various recent articles on the topic. Does anyone have a better explanation?
"Why Do Gas Prices Rise As Oil Prices Fall?" [CBS4]
"Gas prices continue upward spiral" [AccessNorthGa]
(Photo: Mingo.nl)
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Comments:
I'm totally blaming bunnies.
Or maybe midgets.
Obviousely the oil gods were angry that Obama got elected.
Or something.
All I go on is what I observe and that's when oil prices fall & gas takes forever to drop in price. When oil prices rise & gas prices go up almost immediately.
What Alexander said. Apparently demand bottomed out and now it's lifted a bit so they can afford to raise prices. Pump price has less to do with cost than you'd think, especially when the cost is falling.
I bet it's the Illuminati. Yup. Illuminati.
I have a theory, but it involves furries. I think it's good that you asked consumerist instead of me.
All contango means is that current month contracts are trading at a lower price than future months contracts - this is normal. Backwardation is the opposite.
This is due to the fact that future month contracts include the cost for storage, transportation, insurance, etc. Nearer months cost less to store, therefore they trade at a lower price.
Most likely, there's not enough storage tankers to store all this oil, or demand for storage has increased significantly, so the people who are renting the storage are increasing their prices, which is translating into higher oil futures prices.
@catcherintheeye: Correction - "current month contracts" should read "nearer month contracts".
Just for shits and giggles, backwardation is when nearer month contracts are trading at a higher price than future month contracts. This could result if a terrorist attack blew up an oil tanker. The futures cost in the nearer months would be higher due to the increased difficulty of getting the oil to market; the farther months contracts would be lower since by then the traders are expecting things to stabilize.
Last I heard: OPEC cut production, those bundle of joy speculators got all twitchy over the Israeli vs. Hamas thing, airlines and the U.S. Strategic Reserve started purchasing more due to current low prices. What better time to raise prices? Jack it up, make more money!
@ohenry: Or now that he is elected they can inch the prices higher versus trying to get the pre-election cash out on the prior president...
Which then backfired when wall street took a major dump and then took down the auto companies too...
I'd guess that the oil company executives blew through all the profits from the last couple of years (yachts aren't cheap, you know) and probably Dubai needs to hurry up and finish that 175 story diamond-encrusted tower-to-nowhere that they're in the middle of building.
"It's partly due to some refineries cutting production, both in order to increase demand (and therefore profits)"
A bit of a nitpick, but I don't think you worded this right.
Decreasing supply will increase the price, increasing demand will increase the price, but decreasing supply will not increase demand.
@catcherintheeye: Now that I think of it, the increased demand for storage or increased usage of storage could be from companies who are seeing declines in prices in oil, so rather than putting their crude stocks in circulation, they are storing them to create an increase in the futures price of oil.
So, you have companies who are reducing the supply to the market by storing their oil, which is increasing demand from an assumed fixed supply of oil storage.
The result, when you decrease the supply of oil at a faster rate than demand is decreasing, and you are increasing demand for storage with no increase in supply of storage, you are looking at an increase in the futures price of oil.
For these companies, it makes more sense to simply store their harvested oil to reduce demand, rather than reduce the physical extraction of oil. When you do that, and you start to run out of places to store oil, it increases the futures price.
Contango means Friday you could buy 1 February barrel and sell 1 March barrel and make 7 dollars, which is huge when you talk the volumes that most companies deal in. So if you are a company with storage, you are buying up everything you can since the refiners are not using it right now.
The bulk of the problem now is that so many refiners were not making money for the last several months (crack spreads were pretty awful and they were losing money on Gasoline and Naptha, but Jet Fuel was the big dollar item), they scheduled maintenance for the start of 09, but they all did it at the same time. So gasoline production is lower, ergo price goes up.
So the commentators here just wholesale ignored the technical explanation given, which is based on facts and markets, then jumped on to attack energy suppliers and hint at global conspiracy? Strange.
Oil should be regulated like electricity: It is a utility.
The reason is everyone knew people were loading up the cars and buses to go to the Inauguration, and it would be cold, so they would run their heaters. Go ahead, prove me wrong.
@Alexander: Agreed. I am sure the powers that be thought "They were paying $4/gal before, why the fuck did ever bother lowering it?"
Just like with food prices, they are doing it because they can get away with it. Someone in the supply chain that is.
Its no biggie, its only a few cents and after he moves from "office of the prez elect" to just plain "prez" tomorrow I'm counting on The One to get the price of gas down below $1/gal, along with my 401k back, my cc rate below 10% and all that other stuff everybody who voted for him believes he can do... its all good!
Prices always go down before an election and up afterwards.
Here in OR where gas stations can only sell gas with 10% ethanol, at least part of the price is tied directly to the prices of corn and other ethanol crops.
@sleze69: lucky you, living where electricity is regulated. Out here in California it is still the wild west. I spend my winters in a cold, dark house and my bill last month was $450 (triple what it was eight years ago)
It's just greed by the oil companies and gas station owners.
These price increases can't be blamed on mid-east or other petrol producing areas. They get their dollars from the price per barrel which dropped to around $34 earlier today.
I believe the rise in gas prices we are experiencing as the price of oil drops is just pure greed. And it will continue until people get angry like they did when it hit almost $5.00 a gallon here in Los Angeles during last summer.
It seems like every consumerist post lately is about some corporate greed or misdeed. So sad of a comment about the state of our nation now.
I live in CA and it always goes up in winter, something about changing the gas formulation...
As long as people are willing to drop cash for gas no matter what the price, they'll charge you.
No brainer really. Milk the cow while it's alive. Any other explanation is simply an excuse by the oil companies.
so in other wordss..... we are being gouged.
@sleze69: Utilities aren't a global commodity though. My power company may use a global commodity to produce the product they are selling, but they aren't selling that product 11,000 miles away. It would never work.
increased holiday demand, significant increase in travel due to lower prices, the middle east, speculation, etc.
not a big issue imho
@geoffhazel: Cost of Oil is falling, but crude is refined into many products, not just gasoline. So theoretically if refineries were shifting production to other petrolium products (or even the types of gas that cars don't use, ie Jet and Rocket fuel) and cutting back on gasoline production, you'd see a price increase as supply falls.
@ras_d: They lowered prices earlier because supply outstripped demand. They're raising prices now because demand is outstripping supply. Surprisingly, even gas and oil companies are subject to the laws of supply and demand.
@magic8ball: See [www.riskglossary.com] for the full explanation. But here's their first sentence:
"Backwardation is a market condition where spot prices exceed forward prices. Contango is the opposite condition, where forward prices exceed spot prices."
A friend of mine in the indusry has been telling me that margins have been much smaller than the 30 cents described in the previous quote. He has been saying the margins are closer to 5-10 cents (at least in Southern Illinois) or at cost or below (most of Missouri).
The refineries are going off line for maintenance...a little bit of price manipulation, enron style.
@Fujikopez: I'm partial to the Trilateral Commission myself. All I know is that the Snuggie is prominently involved.
@starrytrekchic: That's ridiculous.
Witches, they were persecuted. Wicca good and love the earth and woman power. I'll be over here.
;-) --->That's Season 7 Xander, with jaunty eyepatch.
God, I'm a geek.
Remember folks... Futures pricing for Aug. 2009 are currently 60% higher than today's pricing. You can count on higher prices!
My theory is that the price went up as the demand increased, caused by people wanting fuel oil to heat their homes. And possibly an increase in driving over the holidays.
This question needs only one answer, which also applies to just about everything else. Why are gas prices rising? Because they can.