Unraveling the Gas Price Mystery

One of the drawbacks of the more pleasant weather conditions this week is that it’s left a hole in our conversational lives. Without snow or blizzards, Albertans are dangerously close to having nothing to talk about in elevators and line-ups at the Tim’s!  Fortunately, skyrocketing gasoline prices have saved the day by providing a new topic for small talk.

Newscasts and headlines have been dominated lately with stories of rising prices at the pump. Experts are paraded in front of the camera to explain soaring gasoline prices, especially this week when oil prices have been falling. And conspiracy theorists are once again up to the challenge, spinning out stories of price setting and renewing calls for an investigation of corporate collusion.

Understanding the daily movement in gasoline prices is a bit like trying to solve the mystery of the Pyramids.  But if you’re intent on trying to untangle the gas price knot, here are six things to keep in mind:

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First of all, gasoline prices are set by a free market—meaning retailers are free to set whatever price they feel the market will bear. This may seem unfair, since so many of us believe that gas is not optional (more on this point below). When gas prices shoot up, there are inevitably voices calling for the government to do something. But quite rightly, governments in Canada are not interested in price setting or intervening in the free market for gas. If you really want the government to dictate low gasoline prices, move to Venezuela.

Secondly, prices are influenced by factors other than just oil prices. Crude oil is the primary input, but other factors such as refining costs, regional supply, inventory levels, seasonal demand, and even potential weather disruptions in the transportation of gas all play a role in determining prices at the pump. Focusing solely on oil prices to understand gas prices is sure to yield unsatisfying results.

Thirdly, we naturally pay much more attention when gas prices are rising than when they’re falling. Prices are currently quite volatile, but over the course of the past few decades, gas prices have tended to track fairly closely to overall consumer price inflation. There have been plenty of times when gas prices have eased. Not surprisingly, we don’t see as many news reports explaining why gas prices sometimes fall even while oil prices are rising.

Fourthly, prices for many other consumer items are just as volatile, but these don’t tend to make the evening news. Prices for fresh fruits and vegetables, for example, can rise and fall very dramatically over the period of a few weeks. Take fresh tomatoes. Grocery stores tend to be competitive in the pricing of tomatoes, and usually prices vary by only a few cents per kilogram (if at all). A disruption in the market—a frost in California, for example—will send prices up in all stores at the same time, but no one calls for a major government inquiry into collusion and price setting by tomato sellers. (Admittedly, the economy is unlikely to grind to a halt if our BLT sandwich turns into just a BL.)

Fifthly, conspiracy theorists are quick to accuse big oil companies, claiming they’re in collusion and setting prices. However, the federal Competition Bureau has looked into this claim six times in the past, and has never found a shred of evidence of collusion. To buy into this conspiracy, you’d also have to believe that the federal government’s independent Competition Bureau is in on the scheme to gouge consumers. If you’re prepared to go down that conspiracy road, you’re also likely to believe that man landing on the moon was a big hoax, too.

Finally, contrary to popular belief, gasoline is not a necessity. You hear it all of the time: “I have no choice but to buy gas.” But is that really true? There are always options in transportation, even if some of those options are not immediately appealing. Public transportation, walking, car pooling, and telecommuting are some quick and obvious options. Moving closer to your place of employment is a longer-term option (although complicated for households with more than one commuter). Buying more fuel efficient vehicles helps reduce consumption as well.

True, rural dwellers and farmers don’t have some of these same options. It’s hard to just hop on a bus when you live 50 kilometres away from the closest town. And Smart Cars don’t make any sense on Alberta’s rural roads in the winter. Still, are there ways to minimize car trips into town? Or organizing car pooling with other rural neighbors? None of us may be able to completely eliminate our gasoline consumption, but we’re lying to ourselves when we believe we have no choice but to buy gas.

The bottom line is that retail gasoline is a complex market. Multiple factors are always at play, and price fluctuations are not really that much more erratic than they are in many other markets.

There is no price setting. There is no conspiracy. But… for consumers, there is always choice.