Friday, October 21, 2005

Gasoline Prices Fact or Fiction: A Primer on Supply and Demand

A great discussion on what drives gasoline pricing by Tom Lehman (Read More)

1 comment:

David said...

The article only considers half the story. Comments about why gas prices rise after a disaster are correct. However, there is no mention why prices fall more slowly after the crisis has passed than the speed at which they rose. Part of the phenomena of prices falling more slowly than they increased involve independent station owners (and most stations are independently owned) who use the disaster to justify raising prices. As long as they stay with the pack they can do so without penalty. So prices naturally gravitate to the highest predicted replacement cost. For the same reason, those same owners drop the prices slower to continue generating the extra profits they rake in for a time (everyone following each other, again, safety in numbers). Yes, the price is set by competition in a sense but no one's in a hurry to drop the price. It may not be overt collusion but it doesn't take a rocket scientist to predict how individuals will act in a crowd, all without a pre-agreed upon plan. Price gouging is very possible in a situation where no one can be singled out for wrong-doing.

I thing a perfect example is a particular situation that happened where I live. I live in New Jersey thirty miles south of Philadelphia. I am very familiar with gas prices in both locations as I work in Philadelphia and see them everyday. For the last 6 months, Philadelphia gas prices ran about $2.70 per gallon of regular, while New Jersey was at $2.20 or so. However, during the response to Hurricane Katrina, New Jersey prices in my area actually passed Philadelphia prices as they increased in each state and New Jersey prices took longer to come down after the crisis passed. So, if the article is correct, the relative increase in replacement costs would have remained constant yet the selling price did not keep the same relative relationship between the two states. Something else was in play, and that something else could easily have been a mass unspoken move to take advantage of the situation (something akin to mob psychology) in local New Jersey gas stations. Or in other words, price gouging on a massive scale.