Gas-Station Owners Aren’t the Enemy

Y esterday, President Biden tweeted out a chart showing the changes in the prices of West Texas Intermediate and gasoline over the last month:

Both the title above the chart and the accompanying comment from Biden fundamentally misunderstand the nature of the gasoline market and of price changes in general.

The idea that gas-station owners are some sort of high-and-mighty titans of industry, rolling in cash while the rest of us languish, is nonsense. As Ryan Mills reported for NR over the weekend, these businesses don’t like high gasoline prices, either: They’re making roughly the same amount of money on a gallon of gas today as they were in the past, because their costs have gone up as well. The profit margin on gasoline is relatively low, and higher gas prices correspond with less spending in the convenience-store portions of gas stations, which is where the higher profit margins are.

A delay in gasoline-price declines after oil prices fall makes perfect sense given the way the business operates. Crude oil must be extracted, transported to a refinery, and refined into gasoline, and then the gasoline must be transported to a gas station. That means the gasoline you’re buying today was produced with oil purchased at the prices of at least a couple of weeks ago.

On the gas station’s side of things, one fuel delivery can also last several days or even weeks, depending on the station, according to the Wall Street Journal. The gasoline being sold right now was purchased at the wholesale prices of the past, and those costs still need to be recouped.

Gas-station owners are just as surprised by price changes as gas consumers, per the Journal:

Heightened volatility makes those pump pricing decisions painstaking for gas station owners such as Doug Robinson. When prices drop, he still has to sell the fuel he already bought for his two stations in central Texas at a higher amount. Because he doesn’t know where prices will go next, he also risks losing money on every new fuel order he places.

“You’re just rolling the dice every time,” Mr. Robinson said. . . .

Mr. Robinson, the Texas gas station owner, said he made a decision earlier this month not to place an order to refuel one of his stations, hoping that prices would go down by the following Monday. More drivers showed up at his pumps than he expected, and he ended up running out of gas, he said.

This sort of price-change behavior is not unique to the gasoline market. Many markets are characterized by what’s known as asymmetric price transmission, or “rockets and feathers”: When input prices go up, consumer prices increase rapidly, but when input prices decline, consumer prices decline more slowly.

In 2000, economist Sam Peltzman wrote a well-known paper called “Prices Rise Faster than They Fall,” which examined the markets for 77 consumer goods and 165 producer goods and found that approximately two-thirds of them exhibited asymmetric price transmission. Peltzman’s primary purpose was simply to demonstrate that this phenomenon is real and supported by data in numerous industries, but he did also look at possible causes. What he determined was that “price asymmetry is as characteristic of ‘competitive’ as [of] ‘oligopoly’ market structures.”

Regardless, lack of competition is not a luxury afforded to gas stations. As NR’s Kevin Williamson wrote last week:

The retail gasoline market is one of the most brutally competitive markets in the American retail environment. . . . There are several big national chains, but the majority of gas stations in the United States are owned and operated by small-time entrepreneurs with only one location — there are some 64,000 such outlets across our fruited plains, and more than 116,000 gasoline retailers in total. That’s one of the signs of a good, competitive market: lots of buyers and lots of sellers.

As Peltzman’s paper noted, though, there isn’t an obvious reason in basic price theory why asymmetric price transmission should occur. A price increase and a price decline, when seen on a supply-demand graph, do the same things, just in opposite directions. So what explains “rockets and feathers”?

Peltzman offered a few possible theories. One is “adjustment costs.” His example of this was input costs purchased under at-will contracts. If input prices rise, it’s easy to cut back on the contracts you have. But if input prices fall, it’s more difficult to find new suppliers to contract with. Another possible explanation he offered was that industries with less vertical integration — i.e., more intermediary firms between production and retail — might see more asymmetric price transmission.

Economist Mariano Tappata offered a theoretical explanation for “rockets and feathers” in a 2009 paper. He also ruled out lack of competition and instead offered search costs as a reason for the phenomenon. He wrote that when prices are high, sellers have less leeway to set them, since the gap between the market price and the monopoly price is smaller. That means prices are less dispersed, so buyers don’t put as much effort into searching for bargains, since they’re likely to pay about the same amount for the same product everywhere. If the market price then declines, sellers don’t need to reduce their prices right away because buyers aren’t looking that hard for deals. Buyers eventually figure this out, which leads sellers to cut their prices more gradually than they raised them.

In truth, asymmetric price transmission is probably the result of a combination of these and other factors. But ultimately, the why of the phenomenon is a secondary concern in this context. The bottom line is that it’s a great big complicated market out there, and Biden has done the world a disservice by pretending otherwise.

Gas-station owners may make a convenient scapegoat for the pain Americans are feeling at the pump, but they’re not the real problem.