why do gas prices change every day?
In: Economics
Great explanations. Can someone explain like I’m 4?
Not for me but for anyone else.
Because gasoline is a commodity product whose formulation is strictly regulated by the state, typically by the Department of Weights and Measures, which tests purity and ensures you’re getting what you paid for. So, if everyone has to sell an identical product to the public, all they can compete on is price. This drives gas station profit margins down quite low. So, when the price they pay to the refiners increases, they have no choice but to pass that onto the consumers, you and me. Likewise, when prices drop, they tend to drop together as they compete for each other’s business. If a gas station location shows consistent high margins, it’s likely that a new station will be built to compete with it, and gain access to an prime location. New apps like Gas Buddy also add additional downward pressure from competition as it permits frugal drivers to plan their fill-ups around the least expensive gas station along their route.
Look into the futures market. Futures are contracts that stipulate a certain number of barrels to be sold on a certain day at a certain price. These futures contracts allow oil producers to get price certainty – if you’re farmer, you’d rather shake hands on a price for 100 cows rather than having the price change every day. The same goes for oil producers. If you bought an oil futures contract, you have committed to buying and taking delivery of the barrels. But, you can sell the contract to someone else. Maybe a Saudi Arabian facility blows up from a Yemeni drone, there will be a supply shock and oil prices go up. Your contract is now more valuable, and you can sell it for profit. The person buying from you has now taken the commitment of buying and taking delivery of the oil. If the Saudis repair their facility at record speed, the price of oil will fall again and that new buyer will lose money. Or you can just be United Airlines and you found a contract whose oil price looks like a deal and you can hold it to delivery. United Airlines doesn’t care if the price goes up or down because the contract has a price engraved in stone. The producer still uses the price of the initial contract.
Every nanosecond the prices change because of algorithmic (robotic) trading. These prices will ripple down the supply chain, finally ending up at the gas station. Prices are just supply and demand, and future anticipation of supply and demand. These change ALL the time.
Well, here in Australia, it’s because the ACCC (a consumer watchdog) simply cannot seem to find any evidence of collusion between the oil companies. This is despite nearly universal hikes across the range of retailers within a 24-48 hour period.
Example: today in Brisbane saw an almost universal jump of about 35cpl for 91 octane rated Unleaded to restart the cycle of regular incremental drops until hike day arrives again.
Fuel is sold on razor thin margins. If the station purchases fuel at, say, $1 per gallon, they’ll sell it at $1.01 or $1.05. Such narrow profit margins means that the price at the pump is very sensitive to price fluctuations.
Latest Answers