I used to be a dummy when it came to gas prices at the pump. I never could figure out why the price shot up quickly but was slow to come down. I'm not a dummy about it any more though. Apparently Joe Biden is a dummy and thinks you are too. So this post is about how and why gasoline prices are quick to rise and slow to fall.
Lets take a scenario where a gallon of gas costs $1.00 for easy math. Lets say the gas station has a 10k gallon tank to hold the gasoline. Say it is full. That's $10,000 of gasoline sales. Say they have a profit margin of 10c ($.10). So when they sell all that gasoline they have made $1,000 (10% of the sale price)
They buy the next 10k gallons of gas for $9000 and repeat the process. Each time they sell 10k gallons of gas they make $1,000.
Now along comes a world event and it now costs them $11,000 to buy that same 10k gallons of gasoline. Well there went their entire profit from the previous sales. Not only that, they have to dip into their cash reserves to fill that 10k gallon tank.Price is going up. Now they have to sell that gas for at least 1.20 to make up what they lost AND get a profit.
Ouch.
But wait. Imagine that while they are between purchases, more world events are happening and the expected price has risen to $12,000! Then $13,000. Well if you know you have to spend $13,000 in the near future to fill that 10k gallon tank. You have to raise prices at the pump right now. So now we're talking $1.40 to $1.50 a gallon charged due to expected costs.
So now you gotta re-up that 10k gallon tank and the bill is $20,000. If you don't have reserves you're out of business. If you have reserves you pay that price and guess what. Price at the pump is now $3.00-$4.00/gallon.
That's effectively what happened recently. Any price dips you've seen is due to gas taxes, which is usually larger than the gas station profits being reduced or suspended.
Say that the cost to fill that 10k gallon tank drops from $20,000 to $15,000. That's nice but since the gas station had to hit it's reserves to pay for that last delivery the price at the pump is not going down until that delivery is used up. Otherwise the gas station is literally paying the customer to put gas into their tanks.
That's not how businesses survive.
