Gas prices in unison? 1200 people help me explain.
Why do gas prices change when commodity prices change?

Gas Prices Are Up....I know.

HorseGas prices have gone up in the past few days.  Crude oil prices are at record highs.   Coincidence?  As Jack Palance used to say....Believe it, or not.   

Crude oil is the main ingredient in the gasoline recipe.  Where it goes, gas prices follow.  So what's been driving crude oil prices?  As the price is set on the commodity markets driven by numerous global factors, it's never simple.  In fact it's quite confusing.  I think this article from the BBC sums it up best.  It quotes Mark Lewis from Energy Market Consultants as saying:

"The markets are looking for signals from the fundamentals. Some of them are irrelevant, some of them are wrong, some of them are meaningless, but they affect prices nevertheless."

By fundamentals, he's talking about the factors that influence the supply of, and demand for oil.

That means when the media go looking for answers on market moves, they have to try and figure out why many traders made many decisions to buy or sell crude oil based on many different factors that they all deemed to be important.  Imagine you, me and a thousand other people betting on the same horse in a horse race and someone trying to find out why we all bet the same way.   Some may have looked at the fundamentals (track record, jockey skill, age) while others may have been moved to bet for other, less rational reasons (colour of jockey's uniform, horse shared a name with your favourite aunt, etc.).  All of us influenced the odds, but for different reasons that made sense at the time.  But trying to sum up those reasons in one or two sentences would be extremely difficult.   

So the reasons may be varied, but the impact on gas prices is usually the same.  When crude oil goes up or down, that's reflected in the price at the pump.  Clearly it gets more attention on the way up, but it works both ways.  And you can bet on that horse.  Of course.

Photo Credit:  Jeff Kubina

Comments

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Diane Wilson

Mr. Hamilton DID NOT address the question as to why the gas pumped out of the ground at one price INSTANTLY is reflected at the pumps 24 hours later (unless gas is regulated in the province). He took umbrage to the use of the term "customer gouging". TOO BAD, we do feel that way! Just because he has to quote the "party line" we ALL know that the gas takes AT LEAST two months to reach the refinery, has to be refined and disbursed to the pumping stations and sometimes we don't even see the finished product for 6 months. I feel it is just the Oil Companies and the oil producers gouging the consumer.

Garnet Whyte

Perhaps a breakdown on exactly what makes up the cost of gas at the pumps from the time it leaves the ground as crude oil might clear the question up considerably.
For example, how much does the company that OWNS THE OIL WELL receive? How many hands does it go through and how much are the price hikes before we pump it into our tanks? How many times is it taxed by the gov't and by how much? Last but not least why does consumer demand drive the price up? One would think that the more you manufacture the more efficient the operation becomes and the cost goes DOWN...I understand that a shortage may cause a frenzie at the pumps but I fail to understand how it cause a price increase.

Leo  Griffin

Anyone who thinks there is no collusion with pricing, and most of the pump prices (all in this area) going up and in unison, must believe in the tooth fairy.

Jon Hamilton

Diane,

Thanks for your comment. For those who didn't see it, I was on Canada AM this morning with the Consumers Association of Canada to talk about gas prices.

It was tough to get into the detail as we only had a few minutes, so let me add a bit more detail. The question about why gas prices go up and down shortly following a change in the price for crude oil or the commodity price for gasoline is a popular one. I'll post a more detailed answer in the future, but until then, let's consider a few things.

- crude prices are just one of the components. Gasoline is also bought and sold on the markets as a commodity. the price that is set is often referred to as the wholesale price. And it changes throughout the day and ends each day at a final value - much like stocks.
- we therefore sell into the current market. As the commodity market sets the wholesale price for gasoline daily, we set our retail prices based on that. If we didn't have a retail presence (gas stations), we would sell our gasoline to those who do. And the price would be the price determined by the commodity markets. We follow the same approach for our own sites.
- as well, we purchase a fair amount of gasoline to round out our supply for various reasons. We are buying it at the current wholesale price and setting the retail/pump price based on that.

I will always take umbrage with unfounded accusations of "gouging". It's a nasty, subjective term that suggests that I, and the people I work with, are engaged in unethical activity. Working for an oil company, I'll take my fair share of abuse. But, being an eternal optimist, I hope that we can actually get to a point someday where the empty accusations are tossed aside in favour of fruitful and informed discussion.

I hope that helps. Thanks for your comment. We may not agree, but I hope by posting your comment and my response, we've given readers something to think about.

Jon

Jon Hamilton

Garnet and Leo

There's a lot in your comment. Not to cop out, but I'd like to get more information to provide a full answer. We do post the stickers on our pumps that breaks down the percentages. But I can get more info. As in my previous comment, prices are largely set by the commodity markets, putting it beyond the control of any one player in the production chain.

And Leo - after seeing the joy in my kids face after a recent visit from the tooth fairy, I'm a big ol sentimental believer. believer.

Janet Brunger

With the prices of crude oil increasing, how do they justify ncreasing the gas pumps the next day. Does crude oil not have to go through a number of processes before it is gasoline, are there not alot of global pricing factors that have to be considered before pricing increases? If we had a decent Canadian government they would step in and have some empathy towards commuters especially...perhaps by removing or decreasing some of the taxes associated with the pumps. All we do is work to give the government tax money and then they turnaround and spend it unnecessarily or fraudulently .We just work to pay taxes to the government ....where is their empathy in trying to find a solution to this problem which will only get progressively worse. . Something has to be done about this before it gets to ridiculous and we become like China...riding scooters, bicycles, motorcycles, and small 4 cylinder cars thereby impacting the car manufacturers of mid to large size cars.

Jon Hamilton

Janet

Sorry for the delay in responding. I'll leave the tax discussion to someone else, but I did try to answer your other question in a post entitled: Why do gas prices change when commodity prices change?

You can find it here: http://www.pumptalk.ca/2008/03/why-do-gas-pric.html

Dave Escott

I was watching the news last night and it stated that the price of crude oil dropped by $3.00 a barrel. This morning i went to my local gas station and noticed that it went up overnight by 5 cents a litre. Is this right?? can they do that?
I have been noticing that when the price of crude oil goes up one day, the price at the pumps goes up the very next morning. Why is it that when the price of crude oil goes down the price at the pumps still goes up the next morning??? and at such allarming rates. How can they justify rising the price at the pumps by 5-10 cents a litre within hours??IS this price gouging???
When are we going to get together as a society and say enough is enough. The job wages aren't going up...how do they expect some families to cope with the very quick rise is gas. Horrible economy...here we come!!!!!

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