Democrat and Chronicle, November 19, 2010, Friday

Democrat and Chronicle

November 19, 2010, Friday

Democrat and Chronicle

Gas pains

On Oct. 3, the Federal Reserve announced it was going to buy $600 billion in Treasury notes, injecting more money into the economy and weakening the purchase price of the dollar. That pushed up oil prices. And gas prices went up almost immediately at the pump, crawling their way north of $3. Today in the Rochester area, a gallon of regular costs, on average, around $3.08.

But waitaminute, one apoplectic D&C reader emailed me - the gas at the gas stations is already paid for, so why is its price going up? In essence, why do gas prices go up almost immediately if there’s some change in the commodity price of oil? Good question. One that I then posed to Art Wheaton, director of Western New York Labor and Environmental Programs for Cornell University’s Industrial Labor Relations School and an auto industry expert.

What is happening at the pump, Wheaton said, “is not price gouging, at least under the legal definition.” Instead, he said, what you see is fuel prices moving to match some estimate of what the replacement costs of a gallon of gas being sold today will be. In other words, if you buy a gallon of gas at your local Esso station today, that station is charging not what that gallon costs but the distributor’s or wholesaler’s or gas station corporate owner’s estimates of what it will take to replace that gallon when the big gas tanker truck next comes. (Impacting the cost of a gallon of gas is everything from delivery expenses to taxes to the fact New York state has different blends of gas in warm and cold months).

That all seems relatively reasonable. Until you get to the reality that while gas prices go up pretty quickly when oil prices go up, gas prices are faaaarrrrr slower to go down when the price of oil heads south. All of which might help explain the incredible profitability of such companies as Exxon Mobile and BP.