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Rockets and feathers


 

Mike Moffatt explains why another investigation into gas prices isn’t likely to solve anything.

The gasoline market tends to exhibit a behaviour known as “rockets and feathers,” where prices are quick to rise (they rocket up) but are slow to fall (like a feather). The best explanation to why this occurs is from research by economist Matthew Lewis at Ohio State University. When the price of crude oil rises, gas stations must keep pace with those increases or else they will be selling gasoline below cost, since margins in retail gasoline are so low.

But why does this not also occur when oil prices fall? When crude oil prices are falling gas stations will initially offer a small cut in gasoline prices. Consumers are grateful for the falling prices and feel that they are getting a deal. This causes consumers to cut down on their comparison shopping for gasoline. Since fewer consumers are looking for the cheapest station at which to buy gas, this slows down the pressure for stations to lower prices.


 

Rockets and feathers

  1.  You can hear me discuss this issue live on CKNW Vancouver at 7:30 AM EST and CKOM Saskatoon at 10:00 MST. #ShamelessSelfPromotion

    • But as gas prices keep bouncing up and down, and the gas station admittedly makes more money on the way down, how is it that the margins are still so low? 

  2. Why does the Canadian government consider high gas a problem?
    High gas prices reflect the massive profits that are being in Canada’s energy sector, which is good for Canada considering the vast number of jobs in the country dependent on the energy sector.

    Also higher gasoline prices is the most effective way for Canada to meet the green house gas reduction targets which the government has set.

    • Indeed – and why afford these corporations any tax break?  Should we fear they would pass cost onto consumers?  Why should be subsidize the arts, oops, the petroleum companies? 

  3. As the average Torontonian’s opinion serves as a barometer for the national mood, I can relate with confidence that the government’s priorities here are crystal clear and straightforward: we need to shut down the environmentally catastrophic and internationally disgraceful oil sands, make the big polluters pay for polluting, and also find a way to limit the outrageously high gas prices so we can consume gallons of sweet, delicious gasoline on the cheap.  I don’t see what all the fuss is about.

  4. It’s not about the raw gas price, it’s about the margin between crude prices and gas prices.  If the margin is consistently high across the board between competitors, questioning the reason for that high margin is certainly legitimate.

    • Are you suggesting that retailers should not be allowed to have gross profit margin larger than 20%? I know that jeweller’s tend to have consitently mark-ups of over 100%.

      • Not at all.  If some retailers want to push the profit margin to 20% or higher they should be free to do so.  In a competitive system, they probably wouldn’t last long, mind you.

        If all of the retailers pushed their profit margins to the same level at the same time, I would raise an eyebrow and question just how such a thing came to happen. 

  5. The horse questions the whip.

    right

    This’ll be thorough.

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