Why Gas Prices Go Up and Down ~ The Review Stew
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Tuesday, March 20, 2012

Why Gas Prices Go Up and Down





Are you as alarmed by the rising gas prices as I am? Ever wonder what causes gas prices to fluctuate up and down so much? 

Thanks to this great guest post from Check 'n Go, you can find out how the price of gas is determined and what you can do to save money at the pump!
Thanks to Check 'n Go for this great guest post!
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First they're up, and then they're down. And in what seems like moments, they're back up again. Why do gas prices fluctuate so much, who is making all the money, and what is the best way to find the cheapest gas?

How price is determined
According to the U.S. Energy Information Administration (USEIA), “the price of crude oil (is) the main contributor to the large changes in gasoline prices the U.S. has experienced in recent years.”[1]The USEIA website further explains that crude oil prices are greatly affected by supply levels versus immediate and predicted future demand for products made from crude oil.

Crude estimates
Crude oil accounts for 69% of gasoline prices, while refining costs and profits make up 16%, distribution and marketing 5%, and state and federal taxes account for 10%/.[2] Several things can affect the price of crude oil, such as political instability in oil producing nations and natural disasters near production facilities. For example, the threat by Iran to close the Strait of Hormuz, a vital shipping channel, is one reason crude oil prices started creeping upwards at the end of 2011.[3]

However you may have noticed that when crude oil prices fall, the price at the pump fails to follow suit, or at least fails to fall as rapidly. Shouldn’t market forces take over, and competing gas stations offer lower prices? The short answer is they can’t.

The cost breakdown of gas
The price for fuel at your local gas station is determined by the oil company whose name is on the sign, and they take several factors into consideration. Individual gas stations make between 10 and 15 cents on a gallon of gas.[4]That’s about a 4% profit margin. A 50% profit margin is what most other retailers strive for, though the word profit is a bit misleading in the term. Before any true profit is realized, overhead has to be taken out, and that includes everything from the cost of the goods and labor, to rent on the store property and utilities. This may explain why so many oil companies got out of the gas station business a few years ago and instead opted to license them to individual owners and regional operators. For the oil companies, the money is all in the black gold, not soda pop and snack treats.

The rise and fall of gas prices at the pump
As to why gas prices don’t fall with the same speed as they rise, no one is quite sure. For years no one could really prove that this was the case, but recent studies by economists show that this is indeed what happens. [5] One economist suggested that the difference in the speed at which gas prices rise and fall has less to do with collusion and price-fixing, and more to with human nature. When gas prices start to fall a few cents, people think they’re suddenly getting a good deal, and don’t shop around. Shopping around is what tends to lower the price of other goods and commodities.[5]

Supply and demand
Economists point out that it’s a simple matter of supply and demand.[6] However, in the past few years oil production in the United States has increased, while demand has gone down.[7] Prices at the pump though, have continued to climb. It really comes down to a combination of factors that, unfortunately, consumers have little control over, even the obvious solution of using less gas. The only workable solution involves doing a little homework.

You better shop around
Shopping around for low gas prices is what you should be doing, even if prices are headed down. The easiest way to do that is to check the Internet. Gasbuddy.com seems to be the easiest site to use. Simply enter your zip code, click, and a list of stations pops up. You’ll then see the price, location and time of the most recent report. To make it even handier, Gasbuddy now offers a mobile app for your smart phone. Mapquest and the Microsoft Network (MSN) also offer gas price location services, but they don’t seem to be as easy to use as Gasbuddy.

Another option is to join the shopper’s club of your local grocery store. Many chains are now offering a per gallon discount on gas either through their own fuel centers, or through a partnering gas station group. In some cases it’s both. You’ll still want to use the gas price websites to shop around though, as occasionally the grocery store fuel centers can run a few cents higher than surrounding stations. Getting in the habit of comparison shopping now will pay off soon as some experts are predicting oil shortages through 2012, which will no doubt drive up the price of fuel.[8]

About the Author:
Check 'n Go has been a leader in online payday loans and check cashing services for over 15 years, helping to build legitimacy to the consumer lending industry through their work with the Consumer Financial Services Association. Check 'n Go sets high standards for responsible and ethical lending in a rapidly expanding cash advance and payday loan business. Check 'n Go works tirelessly to provide consumers with auto title loans, check cashing, payday loans, and other financial needs.

References

[1]“What do I pay for in a gallon of gasoline?” US Energy Information Administration
Web. 31 July 2011 <http://www.eia.gov/tools/faqs/faq.cfm?id=22&t=10>

[2] “What determines the price of gasoline?” U.S. Department of Energy. Web. 09 August 2011. <http://www.fueleconomy.gov/feg/gasprices/faq.shtml>

[3] Tugmen, Lindsey. “The 'dire' Straits of Hormuz for lower gas prices.” TodaysTHV.com. Web. 29 February 2012. http://www.todaysthv.com/news/article/198666/288/The-dire-Straits-of-Hormuz-for-lower-gas-prices

[4]Rendon, Jim. “10 Things Gas Stations Won't Tell.” Smart Money. Web. 31 July 2011
<http://www.smartmoney.com/spend/rip-offs/what-gas-stations-wont-tell-you-19750/>

[5] Sullivan, Bob. “Why gas prices go up much faster than they come down.” MSNBC website. 25 April 2011 <http://redtape.msnbc.msn.com/_news/2011/04/25/6527434-why-gas-prices-go-up-much-faster-than-they-come-down>

[6] “Gasoline Price Changes: The Dynamic of Supply, Demand, and Competition.” FTC.gov. Web. 29 February 2012. http://www.ftc.gov/reports/gasprices05/050705gaspricesrpt.pdf

[7] Raz, Guy and Baughman, Brent. “Rancher’s Land Becomes Ground Zero In Energy Fight.” NPR.org. Web 29 February 2012. http://www.npr.org/2012/02/25/147413520/ranchers-land-becomes-ground-zero-in-energy-fight

[8] Schiffman, Betsy. “U.S. Military Warns of Oil Shortage as Early as 2015.” Daily Finance. Web. 31 July 2011. <http://www.dailyfinance.com/2010/04/16/u-s-military-warns-of-oil-shortage-as-early-as-2015/> Report PDF: <http://www.jfcom.mil/newslink/storyarchive/2010/JOE_2010_o.pdf >


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