Wednesday, May 28, 2014

why does the price of gas fluctuate so much?

For prices, you always look at demand, supply, and market structure. Demand for gas doesn't fluctuate much-- and the fluctuations are relatively easy to anticipate. One interesting application: when an economy is trying to recover, energy prices tend to rise a bit as demand increases. But overall, not much here.

Supply of gas doesn't fluctuate much in terms of technology. (It improves over time, but doesn't really fluctuate.) Costs can certainly move, particularly with the price of oil (including exchange rates and the "strength of the dollar").

Market structure is more interesting than at first glance. If markets are competitive, then price is "forced" to mirror costs, more or less. And one would think that the market for gas is competitive. But at the refinery level, it's less than competitive; they're aren't all that many refiners in each region (and transaction/transport costs are significant).

On top of that, government regulations result in "boutique fuels"-- where the EPA requires certain additives for Louisville-area gas vs. Indy gas vs. "normal" gas, etc. So, our gas tends to be more expensive to produce than non-boutique fuels. And depending on how many areas of the region need Louisville's boutique fuel, the market for "our gas", at the refinery level, may be *far* less than competitive. To the extent that a market is less competitive, sellers may be able to increase price for a time, until other sellers bid that away with lower prices.

So, the two primary candidates are supply and the impact of govt regs (and their connection to costs and market structure). My guess/intuition is that both play a significant part. And generally, I'd recommend buying gas when you're outside of a city.


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