In a comment on an earlier post, Diane Wilson asked me why the price at the pump changed quickly after a change in the commodity price for oil or gasoline? After all, it isn't refined and distributed to the gas station the next day. So what gives? I've answered this question a few times over the years, but apparently with limited success. So let me try a different approach.
It hit me when I was getting ready for a recent trip with my family and went to the bank to get some U.S. currency. At first, I was happy with how many greenbacks I could buy with my good ol' Canadian loonies. But then I looked at the bills. Some were printed years ago and were quite worn. One US dollar bill was printed in 2002, when it took $1.38 in Canadian funds to buy one American buck. Yet, there I was, buying that bill and many others at par. Was this a masterful money-saving heist on my part which I would laugh about as I roared out of the bank parking lot in my aging minivan? Sadly, no. I was merely paying a price for the U.S. money that had been set by the currency markets just hours before I stepped up to the counter. That price was the result of a number of market factors that had nothing to do with me and the teller, but we both accepted it.
Take it one step further - if I came back from my trip with some leftover cash (dream on), and a year from now a friend who was heading to the US but didn't have time to go to the bank asked to buy some US funds off of me, I'd probably sell it to him at the current market price. That could mean more or less for me, but we would likely both agree it was fair.
So how does this relate to gas prices?
Well, gasoline and crude oil are commodities, which means they are bought and sold at prices determined by the commodity markets. Like the dollar, the daily price can be impacted by a complex array of local and international factors. Bottom line: the ' wholesale price' for gasoline changes daily.
So why does that change the price at the pump? Well, first of all, Petro-Canada purchases a fair amount of gasoline to round out supply requirements and has done so for years. We are therefore buying in the wholesale market, where the border is open and prices are set by the daily swings of the market.
For the gasoline we produce and sell, we work with the same wholesale price that can change from day to day. Why? Because if we didn't have a number of gas stations, we would sell it to those who do. And we would do so at the accepted daily wholesale price (see commodity markets). We therefore follow that approach at our gas stations.
As the retail price, like most other products, is a reflection of the wholesale price plus a bit of a margin for the end retailer, it's naturally going to go up and down based on what's happening on the markets. We all know when this works to our disadvantage, but it can have the same effect when commodity prices for gasoline and crude oil sag. Pump prices drop and there is little anyone who refines or sells gasoline can do about it. Just like when it goes up.
The worth of the change in your pocket has nothing to do with the cost of the raw materials and the fine craftsmanship at the mint. It's the markets that tell us how much it's worth on a daily basis. Crude oil and gasoline prices pretty much operate the same way. We readily accept that when buying a few bucks to head south or purchasing something online, but when it comes to filling up our tank, it's got to be something else. Something unseemly. It's just not the case. The cost of the the raw materials, etc are not the factors to watch. Check the markets on a daily basis and you'll find the answers.
Now does anyone want to give me $1.38 Canadian for my 2002 US dollar? $1.35? $1.25?
Photo Credit: SqueakyMarmot