Saturday, March 03, 2007
Why do gas pump prices fall so slowly when crude falls?
I often hear people complain that gas station owners jack the price of gasoline immediately when the price of crude rises, but slowly lower the price when crude falls.
Why is that? Why can they get away with lowering prices so slowly. I'll tell you why.
American consumers are lazy.
Look at the photo above. The closer Shell station is selling gas for $2.30 and the adjacent Chevron is at $2.31. Oddly, the Chevon had three cars filling up and the cheaper Shell station had only two. I've seen these two stations which share a parking lot vary by three cents. How can the price vary so much between two adjacent stations, when Adam Smith's invisible hand tells us that people would flock to the cheaper price? It's because the gas station owners know that the American car driving public are slothful creatures of habit. We will fill up at the same station regardless of the price - we are just too lazy to look out our windows, compare the prices and do a subtraction.
If you want gas stations to lower their prices faster, ruthlessly seek out the best deal in town. This will force the owners to be competitive. As it it now, the owners think we are just herd animals - and they are right.
(BTW, all the gasoline at these stations come from the same pipeline. Shell puts in 300,000 gallons in Houston and draws out 300,000 in New York, but it's not the same 300,000, it's just the same amount. So Shell could be pulling out gasoline put in the pipeline by Chervon. OK, the companies add their own additives just before taking the gas to the station, but big deal, it's just gasoline.)