Pump Prices May Inch Down More
The headlines say oil prices have fallen 15 % already. Gas station receipts tell a different story - the cost of filling 'er up has slipped from about $60 to $50. Big deal.
The cost will probably drop further, but drivers shouldn't hope for a big windfall at the pump: there's a lot more that goes into gasoline prices than the current cost of crude oil.
Besides taxes and the costs of refining, distributing and marketing, there are factors such as local competition among gas stations. Just as with other forms of retail, consumers see savings when one retailer lowers its price, and the others scramble to match it.
If gasoline costs me a dollar a gallon, and my competition down the street is selling it for 89 cents, my customer doesn't care what I paid for it.
Crude oil prices have fallen from about $61 to $51 a barrel this year, but the price of gasoline on the side of the road has declined more slowly.
A typical car holds 12 to 15 gallons, so if it's filled four times in a month, that's savings of less than $10 in a month - not even enough for that daily cup of coffee.
Pump prices haven't plunged to $2 a gallon yet, which is where they were back in early 2005, when crude oil prices were also around $50 a barrel. The big difference was that, unlike now, crude oil wasn't coming off a record high of $78 a barrel just six months earlier.
Essentially, the recent price drop hasn't completely sunk in on the wholesale level, so gasoline retailers are still paying a lot for their product and won't lower prices until competition forces them to do so.
The price of crude oil accounts for about half the retail price of gasoline. That means if crude oil is down 15 %, pump prices should be down almost 8 %.
But the time it takes for a drop in wholesale prices to fully affect retail prices is around 12 weeks, though most of the drop happens within the first two weeks.
Retailers aren't making their price decisions on the price of crude oil. Instead, they focus on how much they paid for their current load of gasoline, and how much their supplier is telling them their next load will cost.
We don't care about anything except what that tank the truck just brought in cost.
A sharp rise in crude oil is another story. After crude spiked to record highs the past two summers, it didn't take much time for gasoline prices to follow suit. That's mainly because retailers got nervous that their next shipment of gasoline would cost a bundle, and also because they knew that summer demand is high and drivers could at least for a while pay inflated prices, albeit reluctantly.
The average gasoline retailers have to charge 13 cents per gallon more than they paid to break even and mark it up even more to make a profit.
In 2006, the average gross margin for retailers was 13.76 cents a gallon - meaning profit was less than a cent per gallon. Because of credit card transaction fees, the credit card industry profited more from gasoline sales last year than gas stations did.
So station owners are loath to bring prices down too far too fast, especially if they're recovering from profits that were squeezed last year. Price wars hit in November and December, even though wholesale prices were fairly steady and crude oil was down from its summer highs.
Crude oil prices are about $10 lower than where they were a month ago, and many market analysts are saying they could tumble even lower. The reasons include the Northeast warm winter, which caused a glut in heating fuels, and traders following a wave of big funds in making bets in the market that prices will fall. Also, demand may not be as high as some had thought: Canadian demand for petroleum fell to below 2004 levels.
At this point, aside from retailers who are trying to make up big losses from last year, there's no reason gasoline prices need to stay high.
Retailers need to see the development of a trend to lower prices. They need to be convinced that these prices will stay down. Now that we're going into third week of prices below $60, a trend has been established yet.
Pump prices will fall further, nearing $2 a gallon in the coming weeks, as gasoline retailers ramp up the competition.
Historically, gasoline prices tend to drop 2-2.5 cents for every $1 that crude oil drops in the energy markets. With crude oil prices down $10 now from its December levels, Ottawa drivers are likely to see pump prices fall about 10 cents further.
Overall, drivers should see a bit more savings when filling their tanks, perhaps enough to upgrade their coffee to a latte occasionally. But they shouldn't get too comfortable, because the spring and summer driving seasons could push prices back up. Not only does demand rev up as more people go on road trips, but the type of gasoline is more expensive to refine - summer gasoline has to meet environmental regulations that winter gasoline does not.
The cost will probably drop further, but drivers shouldn't hope for a big windfall at the pump: there's a lot more that goes into gasoline prices than the current cost of crude oil.
Besides taxes and the costs of refining, distributing and marketing, there are factors such as local competition among gas stations. Just as with other forms of retail, consumers see savings when one retailer lowers its price, and the others scramble to match it.
If gasoline costs me a dollar a gallon, and my competition down the street is selling it for 89 cents, my customer doesn't care what I paid for it.
Crude oil prices have fallen from about $61 to $51 a barrel this year, but the price of gasoline on the side of the road has declined more slowly.
A typical car holds 12 to 15 gallons, so if it's filled four times in a month, that's savings of less than $10 in a month - not even enough for that daily cup of coffee.
Pump prices haven't plunged to $2 a gallon yet, which is where they were back in early 2005, when crude oil prices were also around $50 a barrel. The big difference was that, unlike now, crude oil wasn't coming off a record high of $78 a barrel just six months earlier.
Essentially, the recent price drop hasn't completely sunk in on the wholesale level, so gasoline retailers are still paying a lot for their product and won't lower prices until competition forces them to do so.
The price of crude oil accounts for about half the retail price of gasoline. That means if crude oil is down 15 %, pump prices should be down almost 8 %.
But the time it takes for a drop in wholesale prices to fully affect retail prices is around 12 weeks, though most of the drop happens within the first two weeks.
Retailers aren't making their price decisions on the price of crude oil. Instead, they focus on how much they paid for their current load of gasoline, and how much their supplier is telling them their next load will cost.
We don't care about anything except what that tank the truck just brought in cost.
A sharp rise in crude oil is another story. After crude spiked to record highs the past two summers, it didn't take much time for gasoline prices to follow suit. That's mainly because retailers got nervous that their next shipment of gasoline would cost a bundle, and also because they knew that summer demand is high and drivers could at least for a while pay inflated prices, albeit reluctantly.
The average gasoline retailers have to charge 13 cents per gallon more than they paid to break even and mark it up even more to make a profit.
In 2006, the average gross margin for retailers was 13.76 cents a gallon - meaning profit was less than a cent per gallon. Because of credit card transaction fees, the credit card industry profited more from gasoline sales last year than gas stations did.
So station owners are loath to bring prices down too far too fast, especially if they're recovering from profits that were squeezed last year. Price wars hit in November and December, even though wholesale prices were fairly steady and crude oil was down from its summer highs.
Crude oil prices are about $10 lower than where they were a month ago, and many market analysts are saying they could tumble even lower. The reasons include the Northeast warm winter, which caused a glut in heating fuels, and traders following a wave of big funds in making bets in the market that prices will fall. Also, demand may not be as high as some had thought: Canadian demand for petroleum fell to below 2004 levels.
At this point, aside from retailers who are trying to make up big losses from last year, there's no reason gasoline prices need to stay high.
Retailers need to see the development of a trend to lower prices. They need to be convinced that these prices will stay down. Now that we're going into third week of prices below $60, a trend has been established yet.
Pump prices will fall further, nearing $2 a gallon in the coming weeks, as gasoline retailers ramp up the competition.
Historically, gasoline prices tend to drop 2-2.5 cents for every $1 that crude oil drops in the energy markets. With crude oil prices down $10 now from its December levels, Ottawa drivers are likely to see pump prices fall about 10 cents further.
Overall, drivers should see a bit more savings when filling their tanks, perhaps enough to upgrade their coffee to a latte occasionally. But they shouldn't get too comfortable, because the spring and summer driving seasons could push prices back up. Not only does demand rev up as more people go on road trips, but the type of gasoline is more expensive to refine - summer gasoline has to meet environmental regulations that winter gasoline does not.
posted by Ottawa Gas Prices | 8:23 AM
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