Gasoline prices rise when oil prices rise, and fall when oil prices fall - except when they don't. What you pay at your filling station depends on an array of factors, from what happens on an exchange in New York to what the competition is charging.
This can rankle drivers, especially these days. Gasoline reached a national average of $3.51 a gallon on Monday. That’s up 14 cents, or 4 percent, over the past week. The week before, the average rose 20 cents, the steepest increase since September 2008.
A year ago, the price was $2.75. The average is the highest it’s ever been this time of year, and analysts expect it to climb higher in the coming weeks.
Unlike an iPhone or a pair of jeans or a Big Mac, oil and gasoline are commodities, and their prices can change every second at the New York Mercantile Exchange and other trading hubs. Those far-off changes affect the cost of the next day’s commute. Sellers of commodities, like gas station owners and refineries, price their product based not on what it costs to produce it, but on what it costs to replace it.
Station owners need to make enough money selling the gas they already have to pay for the shipment they have coming, often delivered several times a week.
Oil is the biggest factor in gasoline prices. It accounts for 50 percent to 70 percent of the cost. Recent upheaval in the Middle East and strong demand for oil around the world have pushed oil prices over $100 a barrel for only the second time in history. But the price of a gallon of gasoline at the pump rises — and, yes, falls — for a number of other reasons.
Oil prices can be moved by geopolitics, the value of the dollar or Chinese demand. Gasoline prices can be moved by oil prices, refinery problems or even weather that might keep drivers at home. For example, gasoline prices are expected to rise in the next few weeks as refiners switch from cheaper winter blends to more expensive summer ones because the warm air makes gas evaporate faster.
There’s no way to know exactly where the oil used to make the gasoline sold at your gas station came from, or even where the gasoline was refined. Oils from many sources are mixed together on their way to a refinery, and gasoline from many refineries is mixed together on its way to a fuel terminal.
BP, for example, sets a final wholesale price, known as the rack price. It’s this rack price that leads to the final pump price for most station owners.
A wholesaler such as BP or Gulf each has its own formula for setting the rack price. In an attempt to smooth out the spikes and dips in the market, a wholesaler usually buys some of his fuel through long-term contracts. The rest is bought on the so-called spot market, priced at a given moment by a benchmark like the New York Harbor gasoline price.
Every day at 5 p.m., BP tells a station owner what the rack price will be starting at 6 p.m. That price is good for 24 hours.
The station owner decides what price to charge customers based on his ultimate concerns: nearby gas stations.
There are only two or three pennies per gallon in profit selling gas for most station owners. Wholesale gasoline prices have risen 38 cents per gallon, or 15 percent, since the first uprising in Libya on Feb. 15. When wholesale gasoline prices rise fast, filling station owners get squeezed or even lose money because competition prevents them from raising retail prices as fast as costs are rising.
So if it seems like station owners take their time lowering prices when oil and wholesale gasoline get cheaper, it’s because that’s exactly what they do.
“If gasoline prices drop a dime, a station will only pass along one or two pennies a day,” says Patrick DeHaan, an analyst at GasBuddy.com, a website that collects and publishes retail gasoline prices. “They are slower to pass along the discount because they need to make up for money they lost when prices went up.”
Through the first eight weeks of 2011, average gross profits for gas stations were 4.9 percent, according to the Oil Price Information Service. In 2010 they were 6 percent.