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I heard this story / explanation before: You own a gas station and you want to fill up your tanks so you call the distributor and pay $1 / gallon. You then sel
by leetrout 6y ago
I heard this story / explanation before:
You own a gas station and you want to fill up your tanks so you call the distributor and pay $1 / gallon. You then sell that for $1.10 / gallon making a 10% profit.
Now prices of crude doubles and you have 1000 gallons left to sell. It’s going to cost you $2 / gal to refill so you immediately raise your price to prevent a loss and cover the next fill.
I don’t know how accurate that is to the real situation gas stations face but I’d never thought of it in terms of selling higher to afford the next bulk delivery.
- rightbyte 6y agoOh ... interesting take. But how did they order the first tanker? Surely there has to be credit involved in most cases.
- OJFord 6y agoYes, typically bought on credit and then sold for cash with which to buy the next load on credit, etc.
- bryanlarsen 6y agoBut when the price drops back down you don't immediately drop your price because why would you charge $1.10 for something you paid $2 for? But your competitor will lower their prices when they get a refill, so you may end up having to lower your prices before you get your own refill.
- leetrout 6y agoYep, correct.
- Threeve303 6y agoThis is what happened during Katrina and some of the hurricanes of the past decade or two. The situation with the banks is slightly different. The odds that the product, money, will cost more for them in the future does not line up with the recent history of bailouts, regulation changes, etc. During Katrina, for example, it was a safe bet for the gas station owners that the next batch of gasoline could cost significantly more. A reasonable assumption due to the multiple wars in the middle east combined with a bad hurricane season shutting down gulf coast refineries. In other words, the Federal Reserve did not run a discount window to provide cheap oil to gas stations. Even the strategic petroleum reserve, if tapped, would only benefit the refineries. At any rate, one could argue that in both situations the entities involved made the safest and most profitable decision available to them.
- Spooky23 6y agoThe gas station is an agent of the oil company and gets paid commissions. The gas is on consignment, owned by the upstream oil company. The big oil company uses futures and options to manage risk. All aspects of that industry have slowly reconsolidated, so the market forces that push prices down are generally weak.
- fennecfoxen 6y agoAlso, most gas stations don't make significant profits on gas. They make more profit on the attached convenience store. There are exceptions (e.g. near airport rental car returns, or in places where drivers aren't paying for their own gas — there used to be a Shell near San Mateo City Hall that always got on the front page of newspapers)
- kevin_thibedeau 6y agoThat's nice but doesn't explain 30% hikes the day after a global supply disruption. They still have cheap gas in their tanks.
- leetrout 6y agoI understood it that everyone in the chain raises their prices to cover how high it’s predicted to be.