Antique & Classic Cars Blog

Our state has the lottery, the quintessential chance-driven business. We also have gas stations, whose activity is no more predictable. Are the odds of guessing tomorrow’s price at the pumps any better than the odds of hitting the slots?

Maybe we should combine the two and stick a new lever on the side of the pump. You drive up, give it a pull and wherever the whirling numbers stop, that’s your price. Might be five bucks a gallon, might be a nickel—excuse me, 04.9 cents.

Why do the prices jump around so much? It’s not like there’s backroom pandemonium at each service station with suited gas brokers trading one-gallon cans in a din of shouts and clanks. A tanker comes on a schedule, the station buys its gas for a fixed price, and the station proceeds to…vary the price every time an employee wants some fresh air or a little practice moving around big numerals.

Or so it seems….

Someone wrote in to my Weekend Garage column inquiring about gas pricing’s volatility. (Is it just empathy for gasoline’s volatility?) My research led to this conclusion: the essential reason for the variability is supply and demand—albeit a very intense and twitchy supply and demand.

Gas is unlike other products. We use it everyday and most of us can’t get to our jobs without it. And it’s expensive. This means we pay attention and much of the population is price sensitive. Drivers hunt for the best price, fill early when gas is cheap, and maybe try to hold out another day when it seems especially costly.

Stations change their prices frequently because many of them are thinly capitalized. They need the money from current sales to pay for the next delivery. If news stories suggest an imminent rise in the price of oil (due to political upheaval, infrastructure damage, a transportation problem, etc.), stations will raise their prices now, anticipating the future need for more cash.

The practice is self-perpetuating. Once other stations adjust their prices, the station that sits will affect its customer flow. If they sit lower, they will get more traffic. But front-loading sales at a low price isn’t helpful—that station will still need more money for the next shipment if the price doesn’t drop, and if they sell out, their cash flow will be interrupted. They’re better off adjusting the price to stay competitive with other stations, maintaining a steady customer rate and tracking the market more closely so they don’t get caught out. Result? Gas prices that change like the song on the radio.

Lots of knowledgeable people view these pages. If you have more light to shed or an opinion on this rather unique dimension of product pricing, please share it with a comment.

This entry was posted on Wednesday, November 7th, 2007 at 8:04 am and is filed under Car stories. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.