But Breedo is somewhat relevant

Since I've been driving a 40 mile stretch of non-interstate highway repeatedly over the past few days, I've been keeping track of gas prices and am amazed. Not so much at how expensive some stations are (there are big problems in the major domestic supply and refinery region in case certain people -- GEORGE -- haven't bothered to pay attention to the news) but rather the price range.

Yesterday I got gas at a BP for $2.56/gallon and saw prices ranging from $2.53 to $2.99. Today the same BP station was at about $2.79 and the price range on the road was about $2.65 to $3.15. Additionally, the overnight price shock seems to have set off large lines at the cheaper stations (no surprise really).

What I found interesting was that Exxon and Mobil, which generally are the highest priced stations in an area tended toward the lower end today. Several generic stations had some of the highest prices.

My hypothesis (not really developed enough to be a theory) is that the lower priced stations have somehow locked into a lower supply price for at least a period longer than overnight. This can be done by long term contacts or futures market hedging. Brands such as BP and Exxon/Mobil have the additional advantage of being fully integrated companies who are essentially hedged by the fact that they are suppliers to themselves. My guess is that the generic stations with high prices have little choice but to pay overnight prices for their supply and therefore must charge enough to at least break even or choose not to sell gas at all and risk losing all their customers.

What is interesting is that the stations with presumably lower supply cost (especially the brands that are customarily premium priced) are not taking better advantage of their position by marking up their prices under the generous umbrella provided by the competition.

My best example is the main street in my town, where the generic station is priced at $3.15 while the Exxon down the street (within sight) is priced at around $2.75. To top it off (bad pun, I know), the Exxon has much longer opening hours.

Any thoughts?


George said...

That's really weird: if I were the Exxon guy, I'd definitely take advantage of the price umbrella -- at least to the extent of coming within $.40/gallon of it!

Maybe there's something going on here that we don't see: e.g. Exxon saying, "We'll sell this to you for $2.00 a gallon, but only if your profit stays at $.10 a gallon." [The other $1.05 being mostly taxes, plus rent and labor.]

Or maybe the generics can charge an "anti-brand" premium: irrational resentment of the major oil companies leads consumers to prefer shelling out an extra $4 to the Sikh down the street. With the odd price volatility of late, there's been ample opportunity for independents to discover this premium. And, hell: if people were lining up for half an hour at my commodity-selling business, I'd raise the price, for sure.

Finally, keep in mind that gas is often a loss-leader: $1.00 lost at the pump is more than made up for by charging $5.00 for $2.00 worth of sugar, fat, and pretty packaging in the attached Mini-Mart. Many localities even have laws against selling gas at or below cost.

aaothdzs -- isn't that something from an H.P. Lovecraft story?

Robert said...


Good points but

1) I'm not sure about Exxon being able to specify the pump price (they can recommend) under anti-trust laws if they are not dealing with a company owned station

2) The loss leader doesn't hold up in NJ, where all stations are full-serve (no need to get out of car) and most stations, therefore, do not have convenience stores.

Today's sample spread is b/n a Gulf station at 3.50 and a BP about a mile away at 2.79.