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Tuesday, August 23, 2005

Gas Prices

First off, I hate paying high gas prices. I hate it with a passion. However, that doesn't mean we should be rash and blame whoever and whatever for higher gas prices. Really, we only have ourselves to blame.

My local paper has been inundated with letters from people who angry over gas prices. It is sad just how little most people know about economics. Here is one example from today's paper:

I don't understand the price-rising criteria for gasoline. If the station has already purchased the gasoline to sell at a set rate, why does the increase affect the gasoline already in the station's tanks. To me the increase should be on the gasoline that is ordered, not what is already there.

It's kind of like buying bread: On the shelf it's one price, by the time you get it to the checkout counter, there's an increase because of the instability of the flour market?

My response:

Using this woman's thinking, when prices decrease the opposite should be true. When prices fall, a gas station that might have paid more for their inventory would have to keep prices high until that inventory is sold and then they could decrease prices. I wonder how long that would work in the real world?

Although I'm not exactly familiar with the way gas stations set their prices, I would speculate that the reason we don't see wide swings in prices from station to station is to avoid long lines and shortages at some and gluts at others. I'm not saying I agree with it, I'm just saying that that is one way to look at it. I will say that it does seem that prices go up FASTER than they come back down.

Since we are on the topic of gas, I want direct your attention to a pretty good post on the Freakonomics blog critiquing an article (free registration required) that was in the past weekend's New York Times Sunday Magazine. Both (the NYT article and the Freakonimics' critique) are must-reads.

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