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If you’re considering opening up a gas station at your carwash, you might have one major question: Every time the price of oil drops, why does the price at the pump stay high? With 12 years in the fuel business, it seems I’m always being asked how the two are linked.
The short answer is “yes” they are definitely linked, but as you probably guessed, there is a longer answer. When oil prices skyrocketed earlier in 2009, the pump prices kept pace. Now that the barrel price has come down, the pump price is falling too, but slowly. You might call it a controlled descent and there are several reasons for it.
What drives fuel prices?
Fuel prices are affected by a number of things; the price of oil is just one. Fuel is a retail product just like thousands of other things we need from day to day. But unlike other retail products, fuel is also a commodity so supply and demand determine the price on the open market and ultimately at the pump.
Also, unlike retail products, oil is used in many applications — not just as a fuel but also as raw material in manufacturing myriad goods, chemicals, foods, fertilizers, etc. While supply is abundant and demand consistent, prices are stable. But when supply is disrupted, short-term inventory is threatened and this affects millions of businesses worldwide. We quickly see demand surge and prices spike. And there are so many things that can interfere with supply.
Natural disaster: National shortage
In June 2008, an almost nationwide fuel shortage was triggered by a fire in a refinery in Ontario, Canada, and it became a perfect storm. It was an unusually cold winter and when one of three refineries went off-line, a fuel crisis began. Fuel normally brought by rail from Quebec was held up by a strike at the railway. Fuel normally brought by ship from Michigan was blocked by thick ice in the ports.
Soon, commercial filling stations ran out of diesel and businesses weren’t able to operate. Needless to say, fuel was expensive if you could get it and even after supply returned, it was months before inventory was restored and prices came back down. But there’s more to oil prices than bad luck and worse weather.
The rise and fall of prices
A huge part of the rise and fall in world oil prices is market forces — and this is where it gets a little complicated. There’s oil in everything. And by that I mean there’s very little in our lives that doesn’t require oil to produce it, bring it to market, take it home or put it on the table. That’s why oil prices are also affected by indicators like consumer confidence and employment rates.
Also, since oil is global, prices here are affected by demand elsewhere. In the spring 2009 we saw oil consumption in China and India rival that of the U.S. and suddenly oil prices were rising even when U.S. consumption was falling. Commodity markets were trading oil just like gold, foreign currencies and stocks.
Now, with the turmoil in the stock markets and world oil consumption still fairly stable, oil is holding its value nicely because of another distinct advantage oil has — control of supply. Like diamonds and gold, if market prices fall too far, supply can be reduced until the price goes back up.
Jack Lee is the president and CEO of 4Refuel, Inc., a provider of fuel management resources. If you have any questions or comments about this article Jack can be reached at (604) 513-0386 or at: AskthefuelExpert@4refuel.com