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Rockets and feathers: Why gas prices are not dropping

The cost of surplus gasoline has collapsed by 28¢ in the last seven
days. In a normal market, Southern California gas prices should be
dropping like a box of hot rocks, but they aren't ... instead we are seeing
what anti-trust investigators have called the "feather" effect, or what
economists call "sticky prices." When former California Attorney General
Bill Lockyer investigated California gas prices, his analysts said "In California
gasoline prices go up like a rocket and down like a feather."

Yet despite these massive, jaw-dropping decreases, prices have barely 
budged at the retail level. If prices had gone up by 28¢ since last
Monday, we would probably see a retail average in Southern California
of almost $4.60 a gallon today, yet now that they have dropped 28¢ on
the spot market, and retail prices are down only about 2¢

Wholesale Gas Price Limbo: How low will they go before the Majors
lower their prices?

On May 1, I observed that the LA spot market for surplus fuel
had collapsed like a house of cards, dropping 19¢ a gallon in 4 days.
As of today, the spot market has dropped 27.8¢ in the last 7 days
(last Monday the price for spot CarBob was $3.26, and today it is
only $2.98). In addition, fuel analysts Bob van der Valk is reporting
another 7¢ decline for some wholesale vendors. If the retail markets
were as nimble and responsive as the oil industry claimed, our gas prices
in Southern California should be well below $4.00 a gallon on average.
But that isn't happening, even though the value of surplus gasoline has
belly flopped. 

Why are we seeing the feather effect?

Partly because the major brands haven't dropped their prices to the retailers.
And because the major brands aren't discounting, the unbranded independent
retailers that are benefiting from cheap spot market prices right now don't
have to compete.

Blame the majors and the practice of Zone pricing.

The major brands have reacted to the price cuts by foot-dragging. They've
only chopped prices on average by 12¢ in the last week to their retailers,
who in turn, are sitting on high profits for the time being. Consumers can
encourage price competition and spur some rivalry by shopping at the
lowest priced gas stations, which in most cases will be the unbranded
independents.

 

Charles Langley has monitored California energy prices since 1996. He can
be reached at (858) 752-4600