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Up Like a Rocket, Down Like a Feather

That’s a very common saying in the refining industry. When oil prices are rising, gasoline prices generally rise pretty quickly. I say generally because during the recent oil price run-up, gasoline didn’t keep pace because demand was softening. However, when oil prices fall, gasoline prices are usually slow to follow, hence the saying “Up like a rocket, down like a feather.”

While I have heard this saying a number of times, I wasn’t quite sure 1). Whether it was broadly true; or 2). If true, why it is true. A recent article at Environmental Capital – a blog on energy and the environment at the Wall Street Journal – shines some light on the topic:

What Goes Up Must Come Down–But Why Are Gas Prices So Slow?

Most studies conclude that yes—gasoline prices are quick to rise and slower to fall. That holds true seemingly everwhere—from California to D.C. suburbs to the Phillipines. (One glaring exception: the U.S.government’s Energy Information Administration, which concluded five years ago that prices rise and fall at the same rate.) The phenomenon even has a name: “rockets and feathers,” describing the speedy ascent and the leisurely decline. The bigger question is: who’s to blame? You are, in a way.

The theory of the day to explain sluggish declines at gas pumps points squarely at consumer behavior, as the folks at Knowledge Problem pointed out recently. When prices are rising, everybody drives all over town to shave a cent off each gallon. Once oil and gas prices start to fall, people get thrilled by $3.88 gas, and fill up at the corner station. Since there’s less comparison shopping, gas stations don’t have to change prices as often.

I suppose that makes sense. The remedy for this, they suggest, is to patronize more “mom-and-pop gas stations” in order to keep competition strong – and to shop around for the best deal regardless of whether prices are rising or falling.

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August 10, 2008 - Posted by | gas prices, oil prices

18 Comments

  1. I think you hit the nail on the head Robert. One station had gas for $3.61 last week,and they’re getting $3.75 today. The lowest around here is $3.49 as of yesterday. Louisiana has a law mandating a minimum markup of 6 cents above wholesale. Taxes are 38.6 cents. That means the wholesale price the cheapest station is paying is at most $3.04 per gallon. The advertised spot wholesale price is $2.88 . Maybe refineries are taking the opportunity to increase margins.

    Comment by Maury | August 10, 2008

  2. I think you hit the nail on the head Robert. One station had gas for $3.61 last week,and they’re getting $3.75 today. The lowest around here is $3.49 as of yesterday. Louisiana has a law mandating a minimum markup of 6 cents above wholesale. Taxes are 38.6 cents. That means the wholesale price the cheapest station is paying is at most $3.04 per gallon. The advertised spot wholesale price is $2.88 . Maybe refineries are taking the opportunity to increase margins.

    Comment by Maury | August 10, 2008

  3. How can you tell if a station is a “mom and pop” station, or a station that a owner/proprietor rents from a refiner/distributor, or a station that’s completely owned and operated by the refiner/distributor?

    Comment by clee | August 10, 2008

  4. It’s all part of the “ratchet strategy.”

    Send the price up, and then bring it down, but to a point that was higher than before.

    Think about it, now that gas has been above $4.00 gallon — $3.70/gallon seems pretty reasonable.

    Comment by Hawkshaw | August 11, 2008

  5. hawkshaw,

    So you believe that refiners can just get whatever price they want for gas? Why then didn’t we see $6.15 gas ratcheted down to $4.32? Why didn’t we see a longer price spike? Or why not ratchet down to $3.79 instead of $3.70?

    Or better yet, why did gas fall from its high of about $1.50 in 1981, and not reach that price again for good until 2003? As opposed to the greedy CEO’s we have now, was that an era of altruistic refinery managers?

    Comment by armchair261 | August 11, 2008

  6. Its been awhile since I took Economics, but I’ll give this a try. The rocket/feather phenomenon is basically the same as price elasticity of demand. Gasoline demand is fairly inelastic in the short-term. i.e. The consumption of gasoline doesn’t change much with a change in price. Knowing this, there is no reason for a gas station to not increase the price of gas as quantity sold will not decrease much with the higher price. In addition, there is no reason to lower the price since the gas station will not sell any more gas than it would at the higher price. Thus, gas prices rise faster than they drop. Remember this is a “cetarus paribus” example. Its not considering competition, collusion (tacit or otherwise), and other factors.

    Comment by Bo | August 11, 2008

  7. But bo, in your scenario, without competition, why would gas prices ever drop at all? Seems to me competition is an essential piece of the puzzle.

    Comment by armchair261 | August 11, 2008

  8. But bo, in your scenario, without competition, why would gas prices ever drop at all? Seems to me competition is an essential piece of the puzzle.

    Comment by armchair261 | August 11, 2008

  9. From what I recall about economics, quick to rise/slow to fall behaviour is typical of oligopolies. Could this account for what is going on, or is there something else as well or instead?

    Comment by P.M.Lawrence | August 12, 2008

  10. From what I recall about economics, quick to rise/slow to fall behaviour is typical of oligopolies. Could this account for what is going on, or is there something else as well or instead?

    Comment by P.M.Lawrence | August 12, 2008

  11. Actually, EIA, as of 3 years ago, does recognize asymmetry in the lag in gasoline prices. See

    http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2005/gascomparisons/gaspassthrough2005.pdf

    Comment by Doug MacIntyre | August 12, 2008

  12. Actually, EIA, as of 3 years ago, does recognize asymmetry in the lag in gasoline prices. Seehttp://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2005/gascomparisons/gaspassthrough2005.pdf

    Comment by Doug MacIntyre | August 12, 2008

  13. doug,

    I’d like to have a look at that link, but I got an error… seems the link is no longer there. Can you double check? Thanks.

    Comment by armchair261 | August 12, 2008

  14. doug,I’d like to have a look at that link, but I got an error… seems the link is no longer there. Can you double check? Thanks.

    Comment by armchair261 | August 12, 2008

  15. Sorry, the link is getting cut off. (Some of our links are VERY long). You may have to cut and paste the link together in your browser. Sorry about that. The EIA analysis on asymmetry can be found at:

    http://www.eia.doe.gov/pub/oil_gas/petroleum/
    feature_articles/2005/gascomparisons/
    gaspassthrough2005.pdf

    Comment by Doug MacIntyre | August 14, 2008

  16. Sorry, the link is getting cut off. (Some of our links are VERY long). You may have to cut and paste the link together in your browser. Sorry about that. The EIA analysis on asymmetry can be found at:http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2005/gascomparisons/gaspassthrough2005.pdf

    Comment by Doug MacIntyre | August 14, 2008

  17. Hi Doug,

    This should be a link-friendly version:

    Price
    Pass-Through in U.S. Gasoline Markets

    Cheers, Robert

    P.S. I am presention on the utility of EIA and IEA data at this year’s ASPO conference. This Week in Petroleum will feature prominently.

    Comment by Robert Rapier | August 15, 2008

  18. Hi Doug,This should be a link-friendly version:PricePass-Through in U.S. Gasoline MarketsCheers, RobertP.S. I am presention on the utility of EIA and IEA data at this year’s ASPO conference. This Week in Petroleum will feature prominently.

    Comment by Robert Rapier | August 15, 2008


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