Investing Blog

I’ve had a number of people recently ask me why gas prices go up quickly and come down slowly. While we’d all like to say its just simple profits, the more logical answer is that it isn’t just greed. Nope, it’s actually a factor of the supply chain and the franchise setup of gas station chains.

The Gasoline Suppy Chain

Luckily the supply chain for gasoline is relatively simple and easy to understand. Refiners take crude oil, break it down into its component parts, including gasoline, and then sell it on the open commodities exchange. At that point, the corporate gas chains purchase the gasoline, take delivery, and then break it up into hundreds, if not thousands, of trucks to be shipped all around the US. The gas then takes as long as a week to make it from corporate to the individual gas stations. This week is very important, since the price of gas is still changing during shipping, the value of the gasoline in transit rises and falls before it even reaches the consumer.

Price Fluctuations

In the time it takes for the gasoline to go from the refiner to the consumer, the price can change as much as $.10-15 per gallon at the wholesale level. For instance, if corporate were to purchase gas at a wholesale price of $2.50 and it were to rise to $2.60 before it reaches the consumer, corporate is going to demand at the very minimum $2.60 for the gasoline. Why? Well, that gas, though purchased at $2.50 a gallon, is now worth $2.60 on the open market, and although it would be impossible to call back the hundreds of trucks they just sent out, they can hedge themselves on the market to sell a later delivery at that price. Got it? Doesn’t matter if corporate paid $2.50, the gas is now worth $2.60.

So Why Does Gas Take So Long to Go Down?

So, many are left to wonder, when gas falls, why do prices stay high? Again, gasoline is purchased several days, maybe even weeks, from when a chain expects to deliver it to consumers. Gas sold at the pump today wasn’t purchased today. The corporate suppliers purchase from several different suppliers with several different contracts, and the reason gas falls in price slower at the pump than it rises is due to the fact that the only way gas companies can make money on their gas is if they sell it for more than they paid for it. So, if a gas company were to buy gas at $2.50 per gallon and the price were to drop a dime, it couldn’t lower its retail prices by nearly as much. However, as the supply it has in stock is slowly diluted in price by lower cost gasoline, it can adjust its cost.

Consider too that the refiner supplying the gas is working through oil that has been purchased at various prices. So that adds yet another opportunity for volatility in retail gas prices.

Don’t Complain

No, the gas companies aren’t screwing you. No, the gas station itself isn’t making a ton of money. (Most actually make only a few pennies per gallon, and make the rest on candy/tobacco/other purchases in the store). You want your slice of the pie? Fine! Do what I do, buy oil producers/refiners and jump up and down for joy every time the price at the pump rises. You can get in the oil business too!

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