A Canadian's random thoughts on personal finance

Aug 24, 2008

Reducing gas price volatility

When a gas station increases the price at the pump, they should be required to sell it at the new higher price for, say, seven days before lowering it again.

With this rule, a gas station that increases its price too much too soon will get stuck being the only one selling at that high price for a whole week, during which drivers will buy their gas elsewhere. Every time this happens, they may lose a week's worth of revenue, which is about 2% of their annual revenue.

Gas stations will be forced to absorb price fluctuations to keep their prices competitive. They'll have to keep inventories higher so that they can ride out whatever supply situations they normally use to justify raising prices. They may need a cash reserve on hand in case they do get stuck with lower revenues for a week. Existing competition laws will make it illegal for different companies to agree to keep their prices high and nullify this effect.

What do you think?


Michael James said...

Your idea will stabilize gas prices over short periods, but I don't think it would have much effect on long-term average prices.

The main change is that gas stations would not continue to vary prices during the day and week to extract more from certain drivers (commuters during rush hour) and less from others (retirees who shop around during off-peak times).

Patrick said...

Yes, you're right, I don't think this would affect long-term price trends. That's probably something the government shouldn't try to do anyway.

tdiYUZER said...

Nice idea, but the only one that will hurt is the individual gas station owners who are just as confused as everyone else...

I mean, when was the last time you saw a gas station owner pulling out in a new Bentley.

Patrick said...

Perhaps initially, but don't you think the effects would make their way up to the oil companies?

Another question: 20 years ago, gas prices didn't change daily, or even weekly. How did they manage it?

tdiYUZER said...

Unfortunately no. The retail side is not where oil companies are making money. If you consider that the price of oil was below $20 only 10 years ago and gasoline cost $.40/L. Now the price of oil is up 600%, however the pump price is only up 300%... which means they are actually making less on the retail side.

This is the reason you don't see oil companies building huge refineries... there is no money in it... the money is in drilling, not refining or retail.

Traciatim said...

How about instead you set up a government review board that manages the maximum price of gas that stations can charge, but not the minimum. This way you get all the stations charging the max but never any lower because 'the price is regulated'. Then you could have those publicly paid employees get paid simply to set the price to the market price every week and they could essentially get paid to do nothing.

Oh wait . . . We have that. It's called New Brunswick.