a 1997 paper by economist Severin Borenstein of UC Berkeley and his colleagues.<\/a> <\/p>\nThey looked at how crude oil prices affected profit margins at several points in the crude-to-pump voyage of oil to gas, including crude supplies to the wholesale market and wholesale to retail. They found signs of rocket-and-feather price changes at all points, but for the layperson their general conclusion was this: It\u2019s not your imagination.<\/p>\n
\u201cThe evidence … supports the common belief that retail gasoline prices respond more quickly to increases in crude oil prices than to decreases,\u201d Borenstein and his colleagues wrote in 1997.<\/p>\n
The phenomenon is still \u201calive and well,\u201d Borenstein told me Wednesday, adding that \u201cmuch of this is a retail pricing phenomenon,\u201d meaning that much of the explanation can be found at your corner gas station.<\/p>\n
It can also be found in consumer behavior. Specifically, the inclination of consumers to search for lower prices during a spike. When prices are going up, consumers may see a high price at a particular gas station and think it\u2019s an outlier, so they look for alternatives \u2014 even if all stations are raising prices. \u201cThey think they\u2019ve found a bad deal, when in reality all prices are high,\u201d says economist Matthew S. Lewis of Clemson University, who studies consumer search behavior.<\/p>\n
When prices are falling, Lewis told me, consumers lose their incentive to search because they find prices that are similar to what they\u2019ve expected. \u201cOnce everyone\u2019s lowered their prices a little bit, that takes away their incentive to lower them further because no one is looking around for lower prices\u201d and further reductions won\u2019t win gas stations any new customers. \u201cEveryone\u2019s happy at the first station they stop at,\u201d Lewis says.<\/p>\n
Retailer profit margins are chronically slim \u2014 and during rapid crude price increases even negative \u2014 giving them an incentive to raise prices quickly as the cost of crude and of refined gas mounts \u2014 and to try to hold the higher prices steady to recover their margins as their other costs call.<\/p>\n
It\u2019s also true that consumers become more sensitive to higher prices because press coverage makes the price hikes inescapable, and less so as prices fall, even if they don\u2019t fully return to earlier levels. Just now, as it happens, the price of gasoline receives front-page coverage and is flashed almost minute by minute on cable news shows. <\/p>\n
Lewis points out, however, that \u201cthere\u2019s a strong asymmetric pattern in press coverage too. As prices are going up, that\u2019s talked about a lot, and as prices start to fall the coverage goes down and down, and people\u2019s attention does too.\u201d<\/p>\n
That brings us to the factors affecting the price of gasoline. The cost of crude oil is known as the spot price \u2014 the price quoted by traders on the open market. By the time the oil reaches consumers as gasoline at the pump, it has changed hands several times \u2014 at refineries, regional terminals and local distributors. <\/p>\n
The analysis by Borenstein and his colleagues found most of those markets to be reasonably competitive \u2014 that is, their prices adjusted quickly to changes in crude prices. But asymmetry \u2014 prices rising fast but falling slowly \u2014 increased as the refined product made its way to city distribution terminals and subsequently to retail stations. It\u2019s the latter that have the most incentive to raise prices quickly and to stick with them the longest.<\/p>\n
\u201cAsymmetry in price adjustment is a retail thing,\u201d Lewis says, \u201cwhich is what you\u2019d expect if the source is consumer search rather than collusion.\u201d<\/p>\n
It can be difficult to pinpoint the factors reflected in retail gas prices because they differ among regions. After Hurricanes Katrina and Rita laid waste to drilling, transport and refining facilities around the Gulf of Mexico coast in 2005, gas prices soared in the South, Midwest and along the East Coast, which depended heavily on crude and refined gas produced in or near the gulf. That resulted in gas prices jumping by nearly 60 cents per gallon, according to research by Lewis. <\/p>\n
But the pace at which the increases ebbed differed within that market, in part because its retail structures differed among states and cities. In those with high concentrations of independent gas stations \u2014 those unaffiliated with branded refineries \u2014 prices fell relatively faster. <\/p>\n
The reason, Lewis found, was that those communities experienced \u201ccyclical pricing,\u201d in which gas station owners had a habit of changing their prices frequently as a competitive device, often moving the price of gas day by day. Strategic pricing tended to make high prices relatively less sticky.<\/p>\n
California is another unique market. The state\u2019s limited refinery capacity makes it more vulnerable to crude price shocks, and its mandate for anti-smog gas formulations in the summer also constrains gas supplies, pushing prices higher. California\u2019s gas taxes are higher than the national average, contributing to its nation-leading prices at the pump. <\/p>\n
Then there\u2019s what Borenstein has identified as the state\u2019s \u201cmystery gasoline surcharge,\u201d<\/a> an unexplained differential in price that originated after a 2015 fire at a Torrance refinery then owned by Exxon Mobil, but persists without explanation more than a decade later and is currently estimated at more than 50 cents per gallon. <\/p>\nWhat\u2019s indisputable is that consumers are paying for the Iran war at the pump, and they\u2019ll continue to do so for weeks, even months, after the conflict is resolved and the Strait of Hormuz is opened again to all traffic. Economists observe, furthermore, that large price spikes at the pump take longer to return to equilibrium than small ones, in part because retailers can keep prices high until they see evidence that they\u2019re losing customers.<\/p>\n
In other words, it\u2019s reasonable to feel relief once crude oil prices retrace their journey back to where they were before the Iran war began. Just don\u2019t expect to feel relief at the pump any time soon. <\/p>\n","protected":false},"excerpt":{"rendered":"Here\u2019s the name for an economic phenomenon that consumers are going to be hearing a lot more in…\n","protected":false},"author":2,"featured_media":25979,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[15887,6956,9153,15885,3864,6085,5220,8,7059,6077,9,6088,542,7815,15886,15888,148,7],"class_list":{"0":"post-25978","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-top-stories","8":"tag-borenstein","9":"tag-colleague","10":"tag-consumer","11":"tag-crude-price","12":"tag-gas-price","13":"tag-gas-station","14":"tag-gasoline","15":"tag-headlines","16":"tag-high-price","17":"tag-lewis","18":"tag-news","19":"tag-oil-price","20":"tag-president-trump","21":"tag-price","22":"tag-pump-price","23":"tag-refinery","24":"tag-state","25":"tag-top-stories"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@news\/116536541512030985","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/news\/wp-json\/wp\/v2\/posts\/25978","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/news\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/news\/wp-json\/wp\/v2\/comments?post=25978"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/news\/wp-json\/wp\/v2\/posts\/25978\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/news\/wp-json\/wp\/v2\/media\/25979"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/news\/wp-json\/wp\/v2\/media?parent=25978"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/news\/wp-json\/wp\/v2\/categories?post=25978"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/news\/wp-json\/wp\/v2\/tags?post=25978"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}