Oil Prices and the local price for gasoline

I saw it again.

A Bloomberg article said crude oil fell to a 19 month low or $51.21 a barrel. On the comments section at Lucianne.com, someone asked (paraphrased) why do gas stations raise the price immediately when prices increase but take a while to lower the price when oil prices go down?

Welcome to Econ 101.

The basic answer (as the station owners admit to on TV), when the price of oil increases, they raise prices on anticipation of more expensive fuel in the future. The don't want to lower prices when oil prices fall because they already have the more expensive gasoline in their storage tanks they need to sell first.

And folks need to remember its not just the local gasoline station setting the price. The distributor and the refinery all adjust their prices based on what the future costs of the material will be and adjust their prices accordingly.

The oil industry isn't the only one to practice this type of pricing either. The computer industry follows the same logic. When a memory factory in Taiwan burns down (as what happened a number of years ago), the price for RAM went up over night. Even though the RAM on store shelves didn't change from before or after the fire, but everyone knew that RAM would be in short supply until the factory could be fixed and put back into production. So everyone started to buy RAM and the shortage everyone feared developed because of the panic buying. Of course stores will raise prices if something is selling out quickly and they are not likely to be able to order new supplies, the laws of supply and demand apply. Demand goes up, so do prices. However once the panic ended, the industry saw there was still enough memory even with the factory off line so the price started to come down on RAM. However, for the people and stores who purchased the high price RAM, they wanted to get rid of it without losing too much money so they tried to hold prices steady while the old RAM was sold.

Bottom line, if people think there will be a shortage of the item or a price increase for an item in the future, they will raise prices on their current stock so they will be better able to pay for the higher prices and to make some additional profit. When the shortage turns into a glut, people will try to hold prices at the old level until they can sell the existing inventory at the high price and then lower prices for the new cheaper inventory. If another vendor has the same or similar item and can lower prices faster (by holding less inventory, like Dell Computer for example) then the companies holding the high priced inventory will take a bath on liquidating their inventory just to keep market share. Its called capitalism.

That's enough rambling for today.