gas pricesIt's a well-known law of physics that everything falls at the same rate. But as frustrated motorists have had reason to notice lately, that law doesn't apply to gas prices. You aren't imagining it: Usually, the price of gas rises much faster than it falls.

This phenomenon has held true for decades, and recent price trends have been no exception. On Thursday, the retail price for regular unleaded averaged $3.52 per gallon in the U.S., up a massive 37 cents in just one month -- and a whopping 60 cents, or 20%, since December. Several different factors have contributed to this trend.

In many cases, gas price hikes are tied to wholesale prices. Many gas stations have contracts that require them to raise their prices as soon as their suppliers -- often oil companies -- raise theirs. Some gas stations also anticipate higher wholesale prices and hike their prices in advance to make up for the expected gap.

Here's an example: If the price of oil increases $5 a barrel, it will typically cost an additional 10 to 12 cents per gallon -- in wholesale prices -- for the retailer's next delivery. Gas station operators know this, and often will immediately increase the pump price of gasoline 10 to 12 cents in response. When they do this, retailers are essentially basing their prices on the cost of replacing the gasoline that's being used, rather than on the price they originally paid for that gas, to help even out their cash flow.

Smoothing the Cash Flow

The opposite happens when gas prices are dropping, leading to slower decreases as gas station operators hold off on lowering their prices in order to cover the earlier costs of buying more expensive gas. Here's a simplified version of what happens (excluding taxes and the cost of environmental regulations that also affect gas prices): Say you're a gas station owner who buys 10,000 gallons of regular unleaded gasoline -- a month's worth -- at Wednesday's wholesale price of $2.85 per gallon. Your bill comes to $28,500.

Imagine that you sell 9,000 gallons over the next three weeks, but then the price of oil drops, bringing the wholesale price for gas down 10 cents to $2.75 per gallon. You'll be able to buy your next 10,000 gallons at the lower price and cut your pump price by 10 cents per gallon as a result, but if you reduce your prices right away, you wouldn't cover the cost of the remaining 1,000 gallons of gasoline that you already bought at the higher price. Most likely, you'd wait until you'd sold those 1,000 gallons before cutting your price.

In this way, as retailers wait to cover the costs of the higher-priced gas still in their tanks, gas prices decline more slowly than they rise.

Maximizing Profits

Other factors also play a role in this phenomenon, however. One of these can be considered either "profit maximization" or greed on the part of station operators, depending on your perspective.

Sometimes, even after a station has sold all of its expensive gas at that higher price ($2.85 per gallon in our scenario), it will keep pump prices high and pocket an extra 10-cent-per-gallon profit on the cheaper $2.75 per gallon gas. As station operators squeeze an extra dime, nickel or even pennies out of each gallon of cheaper gas, for as long as possible, that lengthens the amount of time it takes for pump prices to fall.

If stations are all inclined to keep prices high, what persuades them to cut them? Competition, of course. If an area contains multiple gas stations, all of which want to boost their market share, one or two will inevitably lower their prices by a penny or two (or more) in the hope of increasing sales. Others will respond by cutting their prices too, until the pump prices finally reflect the reductions in the wholesale price.

Gas stations equipped with convenience stores, which generally earn more money from store sales than gas sales, typically can afford to lower their prices first. Meanwhile, some stations keep their prices high for other reasons -- they might not have much competition, for instance, and might not be concerned about losing a few customers -- but in general, the rule of competition applies.

The Power of Customers

And that means that customers do, in fact, have an impact on prices. To start prices on their slow journey downward, you need to shop around.

That said, customers' control over prices is limited. The largest factor in gasoline's price is still the price of oil, which has remained above $60 per barrel for the last 20 months. Oil prices have been rising -- albeit with volatility -- since December 2008, when they hit a low of about $35 per barrel during the financial crisis.

Given the current global trends in oil supplies and demand, it appears that the best way to cut your gasoline bill for the foreseeable future is to drive less, such as by carpooling more, using mass transit or buying a more fuel-efficient vehicle.

Increase your money and finance knowledge from home

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

Managing your Portfolio

Keeping your portfolio and financial life fit!

View Course »

Add a Comment

*0 / 3000 Character Maximum

424 Comments

Filter by:
wwscottlite

Greed and bullshit.

April 25 2011 at 3:21 AM Report abuse rate up rate down Reply
ishrppa

yea, keep the gas price high so people either pay to go to work or not eat. I had to quit a job because I couldn't afford the gas prices - no I couldn't car pool because of the area I lived in, the hours I worked and the days I worked. These damn anylists are the ass's to blame - they need to keep their traps shut! The reason the oil is a commodity now is because they get more money that way. How the hell can the demand be up when Japan is in turmoil and Australia was in turmoil? And several other countries? Oil companies will do anything and say anything as an excuse to raise the damn oil prices!! There is no reason for gas prices to increase weekly anywhere from 10 cents to 20 cents per week!! NO REASON OTHER THAN WE ARE GETTING SCREWED BY THE OIL COMPANIES AND GAS COMPANIES.

April 12 2011 at 12:44 AM Report abuse rate up rate down Reply
lajoier

With gas doubling in price this year so elect. cars will be every where EVCA stock

April 11 2011 at 6:52 PM Report abuse rate up rate down Reply
Skeet !!

This is another Wall Street propoganda piece written in hopes that the consumer will 'understand'. It's like cancer, as long as there is money to be made in getting a cancer patient to live two years longer there won't be a cure. It's a money maker. Same for AIDS. This is the same thing. Sure they 'could' build a better car, but it would cost so much no one could afford it. How dumb do you clowns think we are? There's a hot chair waiting in haedes for everyone of you greedy fatherless pieces of humanity.

March 30 2011 at 11:50 AM Report abuse rate up rate down Reply
james

Why can't I purchase a great car like my old (now gone,R.I.P.) 1981 VW Rabbit Diesel that got 51 MPG? The damn car lasted 22 years with 674,551 before the milage meter died and the car two years later due to under body rust. The car only needed tires, timing belts, shocks and every few years anti-freeze. The cars they make today get crap mileage and are exprensive to repair. A relative of mine owned a Geo Metro that got 70 MPG but the thing was to small and felt as safe as riding in a coke can. Bring back the VW Rabbit Diesel!!!

March 29 2011 at 3:59 AM Report abuse rate up rate down Reply
shado890

There will be no motoring vacation this year kids....same as last year....fire up the barbeque break out the hot dawgs/hamburgs....badmitten set & whatever.......shado

March 28 2011 at 12:48 PM Report abuse +1 rate up rate down Reply
NO1CHEF99

Thee person who wrote this story did not proof read it or do the math... if you re read it you will see where they have stated that the reason the "gas station raises the price of the fuel (currently in the tank on lacation and paid for)is because the price of gas has risen... so they will have to pay more for their next shipment" then goes on to say that the price of fuel has dropped "but will keep the fuel pump price high to pay for the fuel in the tank( but previously raised and paid for in aicapation for higher cost) that he bought at the higher price and not loose money". Now a may just be a back woods redneck from the south BUT according to the first statement should that extra left over fuel ALREADY be paid for??? How stupid do they think the American people are......

March 21 2011 at 12:49 PM Report abuse +1 rate up rate down Reply
icemanbill23

"Yes we can"...raise the price of oil so high that you suckers will be forced to develop energy alternatives! Yep, that'll work. It's all about "winning the future" folks, so don't worry about it. Winning..duh.

March 20 2011 at 7:57 PM Report abuse +1 rate up rate down Reply
icemanbill23

I guess there will be a little less pollution when most of us can no longer afford to own a car much less fill the tank. All is proceding according to your great plan President Obama! We the Sheeple thank you for "saving the planet".

March 20 2011 at 7:45 PM Report abuse rate up rate down Reply
icemanbill23

Re-elect Obama!...under his plan, "...energy prices will necessarily skyrocket".
Now there's one campaign promise I know he'll keep!

March 20 2011 at 7:36 PM Report abuse +1 rate up rate down Reply