2008 Woodie Awards
Gas prices flux complex
Economics professor explains day-to-day fuel cost variations
Tommy Conroy
Despite the Sept. 29 economic downturn, a Ball State University professor said gas prices shouldn't be immediately affected.
The general public has common misconceptions about how gas prices change, economics professor Cecil Bohanon said.
One factor is mainstream media coverage of gasoline prices, he said, which leads to the idea that prices can increase drastically in a day but are not likely to fall in the same way.
Bohanon said psychological factors make it seem like gas prices never go down after increasing by ten cents or more.
"People pay more attention to price hikes than price declines," he said, "and that's just human nature."
Bohanon said gas prices were determined by the interaction of several levels of production.
He said it seemed to most people for every dollar oil prices increase, gas prices go up 3 or 4 cents. It isn't that simple, he said. Between the refinery and the gas station, dozens of variables can affect prices.
Increases in demand or disruptions in supply can contribute to price differences between regions.
If a pipeline breaks or a refinery shuts down unexpectedly, a region experiences a shortage in supply.
Demand can increase in many ways as well, he said. Gas stations' natural response to a shortage would be to increase prices, he said.
Distribution companies can also increase prices, Bohanon said. During shortages, distributors from other regions will sell to gas stations for slightly lower prices than the normal distributor, but higher than they can sell it in their own region. Prices will remain high until the normal supply returns.
Gas stations buying from outside distributors can also cause shortages when they do this, he said. If gas is diverted from a region to take advantage of higher selling prices, eventually that region can experience its own shortage. Bohanon said at any given time, this process will happen somewhere and it eventually balances.
He said, when their costs increase, gas stations increase their prices but make little, if any, profit and often lose money on gas. Gas stations allow themselves to lose money on gas because they are desperately trying to keep their customers, he said. If they increased the price high enough to make a profit, they would lose business to competitors that kept prices lower.
The general public has common misconceptions about how gas prices change, economics professor Cecil Bohanon said.
One factor is mainstream media coverage of gasoline prices, he said, which leads to the idea that prices can increase drastically in a day but are not likely to fall in the same way.
Bohanon said psychological factors make it seem like gas prices never go down after increasing by ten cents or more.
"People pay more attention to price hikes than price declines," he said, "and that's just human nature."
Bohanon said gas prices were determined by the interaction of several levels of production.
He said it seemed to most people for every dollar oil prices increase, gas prices go up 3 or 4 cents. It isn't that simple, he said. Between the refinery and the gas station, dozens of variables can affect prices.
Increases in demand or disruptions in supply can contribute to price differences between regions.
If a pipeline breaks or a refinery shuts down unexpectedly, a region experiences a shortage in supply.
Demand can increase in many ways as well, he said. Gas stations' natural response to a shortage would be to increase prices, he said.
Distribution companies can also increase prices, Bohanon said. During shortages, distributors from other regions will sell to gas stations for slightly lower prices than the normal distributor, but higher than they can sell it in their own region. Prices will remain high until the normal supply returns.
Gas stations buying from outside distributors can also cause shortages when they do this, he said. If gas is diverted from a region to take advantage of higher selling prices, eventually that region can experience its own shortage. Bohanon said at any given time, this process will happen somewhere and it eventually balances.
He said, when their costs increase, gas stations increase their prices but make little, if any, profit and often lose money on gas. Gas stations allow themselves to lose money on gas because they are desperately trying to keep their customers, he said. If they increased the price high enough to make a profit, they would lose business to competitors that kept prices lower.
Be the first to comment on this story