Why do gasoline prices fall slower than they rise?
(KDVR) — Gas prices soared to historic levels and seemingly peaked in mid-June across the country, but consumers shouldn’t expect prices to plummet as quickly as they rose.
According to data from GasBuddy, the national average peaked at just over $5 per gallon last month and now sits at $4.75 per gallon for the first week of July. So is the worst behind us when it comes to gas prices?
“It may, but the truth is we don’t know,” said GasBuddy lead petroleum analyst Patrick De Haan. “We still could see a hurricane or some unexpected disruption. Keep in mind there have been some improvements to supply.”
De Haan said the high prices are boosting oil refineries’ utilization rates, so they are incentivized to produce as much as possible.
Despite the ramp-up in supply, the market dynamics of the people who set the price of gasoline at the pump make it difficult for prices to fall as fast as they surged. It’s a dynamic described as rockets and feathers, that after rising like a rocket, the fall floats more like a feather.
“Contrary to popular belief, stations don’t actually make money when prices are going up,” De Haan said. “That’s because there’s a lag time of two to five days. If you’re the first station to buy more expensive gasoline, you’re stuck selling it under cost in certain circumstances because your competitors may not have bought that gasoline.”
De Haan said stations can take roughly three to five days to fill tanks, and because of the lag, stations are careful to raise prices and lose out to competition across the street that hasn’t had to refill on more expensive gas during a surge.
“When prices trend up, stations are doing far worse,” De Haan said. “They make up for that loss by slowly passing along price decreases.”
De Haan also pointed out the sense of urgency in consumers when prices are falling: they are less likely to shop around the market because of the relative savings from the last time they filled up.
“That’s why consumers shouldn’t be asleep when prices are down,” De Haan said. “They should be shopping around when prices are rising and falling.”