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News and quick-hit commentary from around mid-Michigan ... from the Morning Sun.

Wednesday, August 13, 2008

Playing the price point game

Speedway is at it again.
Earlier today, Springfield, Ohio-based Speedway made another regional price move, posting a price of $3.95 a gallon at stations from Eastpointe to East Lansing, Kalamazoo to Kentwood, Milford to Mt. Pleasant.
There’s every indication that locally owned retailers will follow along.
How can this be, given the fact that the price of crude oil is dropping? As of today, the price is about $116 per barrel.
Let’s take a look at what happened.
Last summer, we screamed bloody murder when the price of a gallon of self-serve unleaded moved past $3, but we didn’t cut back on gasoline consumption. The price of crude oil last summer was in the $60 range.
This spring, the price of crude oil spiked up to around $140. That’s a 133 percent increase in the raw material for gasoline.
The price of gasoline, on the other hand, increased “only” 33 percent, from $3 to $4
What happened?
• We made a lot of noise
• We cut back on gasoline consumption a little. In other words, we showed the oil companies the price point at which price begins to cut into demand.
• Oil companies made record profits.
What didn’t happen?
• Fuel riots
• A windfall profits tax
• Any serious effort to expand mass transit
• Grass-roots demands that the country move away from gasoline as a motor fuel.
• The economy went into an official, nationwide recession.
Now, if the retail price of gasoline had increased as much as the cost of crude, we would have been paying $7 a gallon at the pump. How many of those things would have happened? All of those things, frankly, would have been bad for the oil companies, so they ate the extra crude cost, saw their refining margins drop, but found the price point at which they can extract the maximum number of dollars from consumers without cutting too badly into demand.
It’s a good bet we’ll see retail gasoline prices between, oh, $3.70 and $4.10 the rest of the year, no matter what happens to the price of crude oil. They got us where they want us.


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