The Business of Gasoline

The economics of gasoline is simple: oil companies sell all the gasoline they have and not one drop more.

If people want more gasoline than the companies have, some one could end up getting no gasoline at all. Fortunately, capitalism is a self-correcting system. If people want more gasoline than exists, the companies raise the price. This causes some people to use less gas. Perhaps they car pool; perhaps they consolidate errands; perhaps they shop closer to home; perhaps they reduce their leisure driving; perhaps they buy a more fuel efficient car. The companies like high prices because that means high profits, and high profits mean the companies can invest in producing more gasoline. Supplying gasoline is their only reason to exist.

On the other hand, if people want less gasoline than the companies produce, the companies reduce the price. People like cheap gasoline because it makes life easier. Companies don’t like low prices because it means lower profits. But even lower profits are better than paying the cost of storing unsold gasoline and having even lower profits. So they sell the gasoline at whatever price it takes to move it all through the system.

This is why the price of gasoline bounces up and down so much. For example, if a refinery has to go off line for maintenance, there will be less gasoline for a while, and the price goes up. When the refinery restarts, the price goes down. If enough people start buying tiny high mileage cars, the price of gasoline goes down. There are millions of factors that cause the price of gasoline to change.

Even future actions can change today’s price. Your local station has to refill it’s holding tanks every week or so. If the station owner knows that gas will cost more next week, he will charge more today so that he can afford to refill his tanks next week. Even far off events will influence today’s prices: if everyone knows a refinery shuts down for maintenance next year, they also know the price will go up next year, so they increase the price a little today in order to replenish their supply in the future..

This reaction to supply and demand, including future supply and demand, extends all the way through the gasoline supply chain. Your local gas station, the local distributor, the pipeline operators, the refiners, the oil producers, and the oil drillers all react to supply and demand, present and future, in similar ways.

Gasoline pricing is simple in concept, but complicated in execution. There are millions of factors that, if everything were perfect, cause prices to fluctuate. Of course, everything isn’t perfect. Accidents happen; people make poor guesses; data is inaccurate; people make poor choices. Prices fluctuate even more because of incomplete knowledge and poor judgment. Gasoline pricing is a very messy and complicated business.

Some people haven’t had the time, willingness, or ability to understand how gasoline pricing works. They make up fictional stories to explain price changes: “big oil” did it, speculators did it, evil Arabs did it. This is much like ancient peoples explaining thunder and lightening as caused by “angry gods”. Such imaginings, based on ignorance, can lead to political actions that only make things worse.

That’s pretty much where we are today!

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