Pump prices slow to budge

By DAVID R. BAKER
Thursday, January 18, 2007

Gasoline prices often seem to rise in a rush. But they come down at a snail's pace, even when crude oil prices tumble.

That's certainly been the case this year. Since New Year's Day, the price of crude, gasoline's main ingredient, has plunged 16 percent. But the decline at the gas pump is scarcely noticeable, just 1.5 percent in the same period.

A gallon of regular in California now averages $2.61, down four pennies from the beginning of the year.

Drivers whipsawed by the last few years' wild changes in gasoline prices have learned to expect slow price declines, even if they don't like them.

"They go up faster than they go down," Joann Stamps of Redwood City, 60, said about gas prices as she shelled out $2.71 per gallon Tuesday to fill up her Mercury. "I have no idea what the game is."

The explanation, many energy economists say, lies with gas station owners.

When the price of crude oil jumps, it triggers a rapid rise in the wholesale gasoline price that station owners pay. That wholesale cost often increases faster than many station owners can raise the retail prices they charge drivers. The owners watch their profit margins shrink, even as prices soar.

"If the wholesale price goes up 20 cents in one day, a retailer is going to have a real tough time posting that 20-cent increase," said Brian Milne, editor of DTN MarketWire, an online news service for the wholesale fuel market. "Consumers would be screaming at him, boycotting him."

So when the wholesale price starts to drop, station owners try to keep their retail prices up as a way to recoup the money they just lost.

"When the wholesale price goes up, dealers get squeezed," said Severin Borenstein, director of the University of California Energy Institute. "Then on the way down, they make some money for a while."

As a result, a drop in the wholesale price of gasoline can take six to eight weeks to be fully reflected in the retail price you pay at the pump, he said. Wholesale price increases, in contrast, take just two to four weeks to hit your pocketbook.

"It's a big difference, and it certainly can be frustrating for consumers," Borenstein said.