Aug 7, 2008
Why is that #1: What is wrong with this picture?
So I started looking today. Questions aside, i made a couple of observations, that while not surprising because we've all suspected it, are still startling and disgusting, really. Take a look at the chart above and notice a few things:
1. The last time oil was at or about $120 like it is now, was in April-May of this year. At the time, gas was selling here in the Twin Cities for an average of $3.45, not the average of $3.60 like it is now. 15 cents higher for gas when oil is the same price? What is the problem here?
2. Comparing the charts is troubling. You'll notice that the red line (oil prices) rises AND falls quite rapidly. There are quick spikes, and quick falls. On the other hand, look at the blue line (gas prices). Notice that the spikes upward are very quick, corresponding with the spike in the oil price. But, the drop in gas prices is much, much more gradual.
For instance, look at the period 12/24/07- 01/31/08.
On 12/24/07, oil was at about $92.50 and gas was at about $2.80. Notice that the price of oil spikes up to about $99 over the next week. Gas prices rise accordingly, to about$3.00-$3.05.
Right about 1/11/08, oil drops back down to about $92. But, the graph shows that gas came down much slower. On 1/11/08, when oil was back at $92, gas was still selling for around $2.95. That's 15 cents higher than it had been selling 3 weeks earlier at the same oil price.
Analyzing the chart quickly shows very quick spikes in the price of gas that accompany spikes in oil prices, but very gradual and slow decreases in the price of gas.
What is going on here?
As the skeptical consumer I am, I can only assume 3 things.
1. This gap in the dropping price of gas is where oil companies make the most money. Think about it. When gas prices go up $.20 over night, what do you do? If you are like me, you wait as long as possible to fill up to see if prices will come down, or you keep you eye open for that gas station that is $.05 cheaper than everyone else. And when you find that station, how do you feel? Like you found a deal, probably. For those who are holding out for the prices to drop, the oil companies keep the prices higher as long as possible so that you will have to fill up at least once at the higher price. If everyone stopped filling up for a couple days every time the price of gas went up, causing the demand for supply to go down, bringing the price of oil back down, the oil companies wouldn't make ridiculous profit on the higher price, because everyone would be able to wait a couple of days for the prices to come back down. This way, they make huge profits for weeks to come after a spike in the price of oil.
2. The "2 steps forward, 1 step back" principal. Kimberly and I talk about this a lot with our own finances. We pay off a big chunk of debt, then something breaks and we have to buy something we weren't planning on. Our solace is that while we've taken a step backward with the unexpected expenses, we are still taking positive steps toward getting out of debt.
This principle plays well for the oil companies on the flip side as well. Every time oil prices go up, the price of gas goes right up with it. But, if gas came right back down with the price of oil (like it should), then oil company profits would never change. They'd be up with the price of oil, and down with the price of oil. By staggering the drop in gas prices, they take 2 steps forward and one step back with their profits.
How? Look at what I already mentioned. When oil prices go up, so do gas prices. But when they go down, gas takes longer to fall, such that, as shown above, gas actually sells for $.10 to $.20 more than it did the last time oil was at that price.
There's money to be made there, but it's a two-fer because we are programmed to expect gas to go up with the price of oil. So, if in theory, oil companies raised the price of gas, let's say, $.20 for every $5 increase in oil, they'd be making an extra $.30 the next time oil went up another 5 dollars. They would raise the price of gas $.20. But, the price of gas is still selling for $.15 higher than it should be because the prices are coming down much slower. And the next time oil drops down to the original price, the gas price only drops $.05. This means that they are now making $.30 more than they should be if gas were responding directly to oil ($.15 from the oil cycle, and $.15 from the second one). You can see the ladder effect here. The oil companies make an escalating profit margin with each oil price cycle.
Most consumers are none the wiser because we are programmed at this point to expect gas to go up with oil, and oil is so volatile, none of us have the energy to keep up with the ups and downs. Besides, by the time gas prices come down, we've forgotten what they were before they went up.
3. The psychological factor. Obviously, there has been some psychological manipulation in every factor thus far, but this one is the most obvious: Every time prices come down, we feel a sense of relief. I've heard people talking this week about how exciting it is that gas is down to $3.50. Really? While that is nice, it's not nearly enough. It's already way overpriced. When Kimberly and I moved to the Twin Cities in July of '05, gas here was $1.95. And, it had been hovering around the $1.50 mark for the 2 previous years. Remember that? But, by bringing down the price, the oil companies give consumers a false sense of relief while they continue to take ever larger amounts of their money.
How's that for a positive spin on things?