Good question: If people are driving less, why are gas prices rising?
Q: If people are driving less, why do gas prices keep rising?
A: People are indeed driving less. Gas consumption has fallen about 1 percent since late January.
Yet, gas prices are on the rise. Gas has averaged more than $3 a gallon for four straight months and, more recently, has surged into record territory. Estimates of how high gas prices will go this year vary from $3.50 a gallon to $4. But virtually everyone agrees prices have higher to go before they fall.
This disconnect between demand and price may seem to violate fundamental rules of economics, but gas prices are actually responding to demand of a different kind: From investors.
Contrary to the views of many conspiracy theorists, gas prices aren’t set by refiners or gas stations as part of a campaign to gouge consumers. Prices are a function of the open market, as manifested in the trading of futures contracts on the New York Mercantile Exchange, or Nymex.
Nymex gasoline futures have been rising, following oil, despite growing supplies of both commodities. Blame the falling dollar, which has made dollar-denominated oil contracts irresistible to foreign investors and to any investors looking for a safe haven for their money during a turbulent time in the stock market.
This buying by investors has pushed oil futures to a series of records in recent weeks, and the rest of the energy complex ” which includes gasoline futures ” has followed.
Unfortunately, consumers pay for this investment frenzy in the form of higher pump prices. And despite mounting evidence that Americans are cutting back on their gasoline habit ” and may cut back even more drastically as gas gets more expensive ” it may be some time before prices start responding to lower demand.
If it’s any consolation, the companies that refine oil into gasoline ” and the mostly independent gas stations that sell it ” aren’t making much money off the transaction. Crack spreads, a measure of the difference between the amount refiners pay for oil and what they get for selling the products they make from it, have fallen into the $5 to $7 per barrel range from $15 to $17 in mid-February, analysts say. That’s down from records in the $30 range last spring.
Large integrated oil companies such as Exxon Mobil Corp. and ConocoPhillips have generated record profits from the sale of oil, but those gains have been limited by falling refining margins. Contrary to popular belief, oil companies don’t refine their own oil; their production units sell the oil they pump to the highest bidder, and their refining units buy the oil they refine from the least expensive source.
Gas stations are lucky to make a few cents a gallon selling gas, and may actually lose money on the sale when people pay at the pump with a credit card and buy nothing else.
“You make a lot more money off of selling a cup of coffee today than you do off a gallon of gas,” said Scott Hartman, chief executive of Rutters Farm Stores, a York, Pa., company that owns 51 gas stations and convenience stores.
Some gas stations have decided enough’s enough. The owner of one gas station in Bushnell, Fla., has let his pumps run dry and hasn’t ordered gasoline in a month. He said oil companies are charging so much money for gas that he can’t make a profit selling it.