Why are local gas prices so similar?
July 20, 2004 10:50 AM   Subscribe

Gas (petrol) question: We've had discussions in the blue about regional price differences for gasoline. But why do different gas stations in the same market region come so close to each other on price? Are the markets for the raw oil and the refining so limited that they all end up with the same cost? I find that hard to believe. Also, is there any difference, in real terms, between gasoline from one vendor versus gas from another?
posted by yesster to Work & Money (6 answers total)
On you last point; there sure is. There is a discount type place that I buy propane for my 4X4 near me. I don't buy their gasoline though as about 3,000 kilometres of logging has shown I get about .75 l/100km worse mileage with their gas than any of the big names. I speculate they have a lower octane gas boosted by a high percentage of alcohol.
posted by Mitheral at 11:51 AM on July 20, 2004

There are two parts to deciding pricing in an unrestricted market: (1) costs and (2) what consumers will pay. Stations that are close together experience the same pressure from consumers, and thus, number 2 becomes a big deal. Their costs may vary, but consumers won't pay more out of pity, so unless higher-cost stations can convince the consumers that a higher-price is worth it, they have to suck up lower profits and settle on the common price point of the market.
posted by dness2 at 12:20 PM on July 20, 2004

Despite what the oil companies press agents say, crude price fluctuations are almost completely decoupled from those in gasoline and fuel. There's a three-to-six month time lag from coming out of the well to going into a car tank. Price of oil today affects cost of gas (to the refiner) in mid-winter.

Further, supply of gas depends strongly on the decision (by the refiner) of how to supply the gasoline (car & prop airplane), kerosene (jet fuel) and diesel (truck and heavy equipment) markets. Go long in one and you short the other two. If there is unanticipated high demand in one market, it can shorten supply and raise prices. Likewise a depression in one market (like a 20% drop in air traffic) means more fuel for everyone. This cycle has a lag-time of 2-3 months.

There aren't a lot of refiners in the US (less than ten, if I recall correctly), and it's almost impossible to import fuels into the US because of very tight quality laws (think California). Indeed, it's impossible to move gas from one internal US market to another. All of these factors conspire to shorten supply and limit competition.

The end result is an oligarchy of refiners in market highly restricted by regulation. Couple that with a very low elasticity in demand, indeed, quickly growing demand, and high, even capricious pricing results.
posted by bonehead at 12:41 PM on July 20, 2004

Most retailers of fuel buy it from the oil companies on a wholesale-at-pump basis. This means that the oil company supplies the fuel to the storage tanks and the retailer buys it from the oil company only as it is pumped. The oil companies set the price that the retailers buy it at based on factors that only they know. The retailer adds their margin and that is the price you end up paying. Both oil companies and retailers watch each other's prices very closely and adjust accordingly.

At least, that is the way it happens here in Australia. It explains how, when a price rise in crude is announced, the price of fuel at the pump jumps within hours, rather than only rising when the current stocks (bought at the old, cheaper price) run out. It doesn't explain why, when a drop in the price of crude is announced, the fuel prices do not drop at the same speed. That is just plain old-fashioned greed on the part of the oil companies.
posted by dg at 3:51 PM on July 20, 2004

Just to add on, in America, buying BP gas doesn't mean you're getting BP gas- you could very well be getting Quick Trip gas. It works something like this:
BP sends x gallons of gas through the gas pipes throughout America. BP needs x amount gallons of gas in their oil truck to fill up a station. Sounds simple, but one catch: the gas that BP gets is from a pipeline system where all oil companies dump their gas into. The only caveat is that the octane rating for each piping system is standard. So, if BP put 100 gallons of 87 gas into the 87 pipeline, they have a quota of 100 gallons they can take out at the other end.
However, there still can be a difference. After the gas has been collected at the end of the pipeline and before it's delivered to the given gas station, the companies add additives to the gasoline that they claim make the gasoline superior.
(I saw all this on a Learning Channel documentary)
posted by jmd82 at 8:22 PM on July 20, 2004

In particular, for those of you who heard about the recent Shell/Texaco high-sulfur fuel fiasco last month, and wondered why in hell both Shell and Texaco would be selling the same gasoline (I sure did)...

In this market, the right to sell retail branded gasoline as Shell or Texaco belongs to a marketing joint venture of the two refining companies called Motiva Enterprises.

Brand names? What do *those* mean?
posted by baylink at 11:32 AM on July 21, 2004

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