The price of oil falls, the price of gas soars... what gives?

Drivers across the country are seething mad. The price of oil has fallen from a high of $147 a barrel in early July to just over $100, but instead of lowering the price of gas, the gas stations have just hiked it up! Many parts of Canada saw a big jump at the pumps this morning, with prices up to as high at $1.36 a litre here in Toronto.

So what’s going on? Are greedy oil companies getting out of control? Not really. The markets are operating just as they should, and supply and demand are still firmly in control. The lower price of oil reflects the long-term view that supplies will loosen relative to demand, while the hike in the price of gas reflects a possible short-term shortage of gas, as refineries in Texas are forced to shut down due to hurricane Ike.

That said, I do find that there’s some “stickiness” with price hikes, in that the price of gas goes up really fast when the price of oil does, but it follows it back down much more slowly. But hey, that’s capitalism for you. Retailers are allowed to charge as much for their products as the market will bear, and gas stations are no exception.

My advice is to stop looking for a Star Chamber where gas prices are set and just invest some of your portfolio in the oil companies instead. This of is as a hedge against high gas prices. You’ll have a whole different attitude towards the price hikes when you’re making money off of them too.

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