Here is one of the questions that a friend of mine asked me (ok, it was Breedo) in a discussion (ok, argument) we had last week:
Q. Pump prices went up sharply overnight after Katrina. How can gas station owners justify raising the price 50 cents a gallon for fuel they've already bought that's sitting in their tanks?
A. To make sure they can afford the next load of gas coming tomorrow or next week, station owners say. In a notoriously low-margin business where lottery tickets and cigarettes are far more profitable than gas, few station owners have much working capital on hand, so they need to raise prices on today's gallon of gas to pay for next week's price increase, said Tom Pickett, owner of Arthur's Sunoco in Dorchester.
''Your next delivery is going to cost $10,000 more, and then what happens if the price goes down?" said Paul O'Connell, executive director of the New England Service Station and Automotive Repair Association. ''You can't stay 30 or 40 cents ahead of the competition. It's a tough game right now."
Breedo has started to become a celebrity here on paci.blog. Maybe I should start a blog with him and argue incessantly until we turn blue in the face...
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Here's the full text:
Scratching your head over the sudden run-up? Here's what happened
By Peter J. Howe, Globe Staff | September 7, 2005
With gasoline prices still high after Hurricane Katrina plunged oil markets in turmoil, motorists remain bewildered over how prices rose so rapidly. The cost of a gallon of gas has jumped by 75 cents in Massachusetts in the last month. But just within Greater Boston pump prices range anywhere from a few pennies over $3 a gallon to as much as $3.60, according to volunteer reports collected by website GasBuddy.com. Here are answers to frequently asked questions about gas prices.
Q. Are prices going to keep climbing? If so, how high?
A. The collective wisdom of the financial markets is that the worst is over. Wholesale gas prices fell nearly 13 cents a gallon in New York commodity trading yesterday, reflecting traders' conclusion that promised shipments of gas from Europe and progress restoring Gulf Coast pipelines and refineries will ease the supply crunch and lower prices in coming weeks, oil analysts say.
The average price of heating oil in Massachusetts jumps to $2.61 a gallon. E4
But the market remains skittish. A disruption anywhere from Texas to Venezuela to Norway to Iraq could send prices soaring again.
Q. What about pump prices in Massachusetts?
A.The Oil Price Information Service, a market-analysis firm, estimated retail gas sold in the state dropped 2.5 cents yesterday compared to Monday, to $3.16 per gallon, based on a computerized sample of credit-card transactions.
Q. Will prices fall back to where they were before Katrina anytime soon?
A. It's hard to say when that could happen because of the current volatility in the market, analysts say.
Q. Why have some stations been able to lower prices, and why do stations charge such wildly different prices?
A. Probably the best way of summing it comes from Sarah Emerson, managing director of Energy Security Analysis Inc., a Wakefield consulting firm: ''Every gas station has a slightly different story in terms of their supply line, and that means they have different prices."
Some of the factors include whether stations:
Get supply under long-term contracts from a big oil company like Exxon Mobil Corp. or Royal Dutch Shell Group, or whether they shop on the volatile spot market through independent suppliers called ''jobbers."
Are geographically isolated or have several competitors nearby whose prices they need to match, either to keep competitive or avoid getting bought dry if they're much cheaper than the station across the street.
Have big storage tanks that accommodate seven to 10 days' worth of inventory, which can keep price changes a little smoother, or rely -- as many do -- on nightly or every-other-day tanker runs, which makes pump prices as volatile as the market.
Q. Usually name-brand stations charge a lot more than the little guys, but that's changed in recent days. What gives?
A. More than half the gasoline sold in Massachusetts is supplied by jobbers who rely on the spot market for their supplies, according to John Quinn, executive director of the Massachusetts Petroleum Council, which represents big oil.
That has contributed to what Quinn called a strange ''inversion" in the market in recent days. Name-brand Mobil, Shell, Citgo, and Hess stations that are supplied under huge long-term contracts are often charging notably less than ''no-name" outlets like Jack's Gas in North Cambridge or Friendly Barry's in Dracut.
Usually the no-name filling stations can undercut the so-called majors because they have much lower marketing and overhead, but they're far more dependent on the spot markets and have been stung by recent wholesale spikes.
Q. But aren't the big oil companies just dictating prices?
A. Under federal law, oil companies like Mobil and Texaco can't tell franchisees and independent dealers what to charge. They only control the small minority of company-owned gas stations. That can explain why gas stations bearing the same brand name vary by many cents per gallon in price.
Q. Pump prices went up sharply overnight after Katrina. How can gas station owners justify raising the price 50 cents a gallon for fuel they've already bought that's sitting in their tanks?
A. To make sure they can afford the next load of gas coming tomorrow or next week, station owners say. In a notoriously low-margin business where lottery tickets and cigarettes are far more profitable than gas, few station owners have much working capital on hand, so they need to raise prices on today's gallon of gas to pay for next week's price increase, said Tom Pickett, owner of Arthur's Sunoco in Dorchester.
''Your next delivery is going to cost $10,000 more, and then what happens if the price goes down?" said Paul O'Connell, executive director of the New England Service Station and Automotive Repair Association. ''You can't stay 30 or 40 cents ahead of the competition. It's a tough game right now."
Q. Do the high gas prices reflect illegal gouging?
A. Massachusetts Attorney General Thomas F. Reilly's office fielded just 32 complaints from consumers about high prices this week and has no clear evidence of price-gouging to prosecute, aides said.
Soaring wholesale prices, some federal officials say, just reflect a functioning free market sending the right price signals that will encourage producers, refiners, and shippers to rush supply back in to make up for what's been sidelined by Katrina. The armada of tankers carrying gasoline from overseas is evidence of that.
The chief economist for the Commodity Futures Trading Commission, James Overdahl, says: ''Energy prices are being set fairly in an open and competitive environment."
Bryan Caplan over at
EconLog notes the large variance in gas prices, and marvels at it.
vqvpec -- Olmec god? Serbian resort?
Get the hell out. This was in the Globe? I bet Derrick Z. (stands for Zstupid) Jackson didn't read it.
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