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Why do stations change prices on same tank?

The Tampa Tribune
Published:   |   Updated: March 19, 2013 at 11:03 AM

Q. Why do prices at the pump rise almost the instant there's a world event? Didn't stations fill their underground tanks a while ago?

-Sherry, Tampa

A. The supply chain moves just that quickly.

"If there's some event in Libya and it looks like somebody might bomb an oil facility, the price of crude goes up," said Fred Rozell, retail pricing director at the Oil Price Information Service.

"And stations have to put money out to buy new gas - and most stations get deliveries once a day, sometimes a couple times a day."

How fast does that work?

AAA estimates the pump price reflects oil prices within 24 to 72 hours. Several reasons:

Buying forward: Everyone buys "forward" not backward.

It starts at the oil processor.

The processor buys oil based on the daily market prices, typically found on the New York Mercantile Exchange.

Yes, it can take weeks for a refinery to process oil into gasoline. But that refinery must keep buying oil at daily rates to keep its factory running.

So they must charge their customers on current rates too. That process flows all the way to the pump.

Daily fill-up: Stations often fill their underground tanks daily, and some busy stations take deliveries several times a day. So when wholesale gas prices rise quickly, so do prices at the pump.

Current prices: Even if stations filled their underground tanks once a month, they must buy their next tank at a price current at the time, not last month's prices.

Take this simplified example with no profit margin:

Say gas costs $3 a gallon wholesale, and a station buys 10,000 gallons. That's $30,000.

The station could sell all that gas for $3 and break even. If prices never changed, it could do this every month.

But if gas prices rose to $3.50, a tanker would cost $35,000. The station would need an extra $5,000 to fill its 10,000-gallon tank.

Stations change prices daily - so each gallon out is based on the price of gallons going in.

If rival stations all take deliveries at different days, there is an incentive to change prices to compete.

It's not a perfect system, and stations could get burned if wholesale prices leap the moment they run dry, but changing prices daily helps.

Submit your question here or visit our Gas Prices page and retail writer Richard Mullins will get you the answer.

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