On Sat, 24 Jan 2004 10:40:01 -0800, Tim Douglass wrote:
No excuse for bad attitude, but gas prices are an odd case. Assume a
station buys 3,000 gallons at a time (pretty typical). They sell it at
a price that is usually 1-5 cents above their invoice (plus all the
taxes). If the price of gas goes up 3 cents and they were selling at 2
cents over cost they have to dig into profit from other sales to cover
the increase, but they can recoup that as they sell the new load. The
problem comes when the price starts to drop. If the station across the
street buys a new load that is 6 cents cheaper and cuts their retail
price while you still have 2,000 gallons in the tanks you are pretty
much up the proverbial creek sans paddle. If you price match the guy
across the street you lose money on every gallon you sell. If you
don't it takes forever to empty your tank and refill with cheaper gas.
Most stations split the difference.

Most stations operate on a replacement cost basis. They adjust
their prices day by day according to the cost of replacement gas
on the wholesale market that day, whether they actually buy any
replacement gas that day or not. (Chain stations may actually
purchase futures contracts day by day, but independents rarely
have the capital to play that game, and just have to sweat out
a changing market.)

Pricing on the basis of replacement cost means they see an
increased profit margin on gas they bought cheaply in a rising
market, and a decreased profit margin on gas they bought dear
in a declining market. But they always generate enough money
to buy replacement gas on any given day. As long as the price
swings aren't too rapid and radical, they don't have to dip into
other revenues to refill their tanks.

Actually, most stations don't do it exactly that way. They do boost
prices immediately when the wholesale cost of gas goes up, but
they reduce prices more slowly as the wholesale price declines,
often waiting for a competitor to make the first move. That delay
helps to protect their profit margin in a declining market.

Jacking up prices on a commodity they already have in their
tanks is when charges of profiteering are heard, And when the
prices at different stations move the same way and the same
amount at about the same time, charges of price fixing start to
be heard.

Because nearly every station's prices seem to move so closely
in sync with every other station in a given area, collusion is a
tempting explanation. It usually isn't true, though. It is just the
way the modified replacement pricing models work out in a
competitive market.

Gary