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What’s the deal with these gasoline prices?

by Eric Stearley

eric@thepaperofwabash.com

The rapid change of gasoline prices can be frustrating. The inconsistency in the value of such a vital commodity can make a trip to the pump feel like a trip to the slot machine – “Should I wait to fill my tank until the price drops? What if it goes up just as I run out? Then I’ve overpaid. But I can’t run out of gas! Maybe the it’s cheaper down the road…” Eventually, you stop the car at a pump, swipe your card, and grab the handle. You watch as the numbers roll by, but unlike a slot machine, you won’t know until the next day, or later in the week, if you’ve won this round.

In late October, gas prices in Wabash approached $3.50 per gallon. While certainly not the highest it’s ever been, it seemed to be more expensive than usual. When locals compared prices in Wabash to those in surrounding towns, they began to wonder why prices at stations in Marion, Huntington, Peru, and North Manchester were falling to $3.00 as prices in Wabash held.

Now, in mid-November, the market has adjusted. On Monday, Nov. 17, the average price in Wabash was $2.93, much closer to prices in the surrounding area: prices for a gallon in Peru range from $2.89-2.97; North Manchester stations are selling a gallon for $2.89; Huntington stations were more expensive than those in Wabash, ranging from $2.95-2.96 per gallon. While it appears that prices have stabilized temporarily, the question remains: what causes the variance in gasoline prices from day to day and location to location?

To answer this question of economics, The Paper reached out to Dr. Michael Kaganovich, chairman of the Indiana University Department of Economics. Kaganovich pointed to two industry-specific factors that could result in price variation between two similar cities.

“First of all, they vary because of county taxes. County taxes may differ,” said Kaganovich. “In Bloomington, our prices are about 20 cents higher than a 20-mile radius, and that’s because Monroe County collects taxes.”

Taxes play an important role in the retail side of the gasoline industry. Federal and state excise taxes each make up roughly 18 cents of the sale price. Sales-use tax is calculated each month based on the average pricing from the six-week period prior to the start of that month, and is roughly 7 percent. In addition, all taxes associated with gasoline must be paid for upfront.

“When I buy gasoline, I pay every tax up front, so then I’ve got a tremendous amount of carrying cost that I have to pay up front instead of paying the government down the road,” said Jim Reynolds, owner of J.M. Reynolds Oil Company, a local petroleum retailer. “So when I pay my sales tax, you’re looking at somewhere between 56-59 cents of excise and sales tax on a gallon of gasoline right now. If anybody’s making a lot of money off gasoline it’s the government.”

Given that the national average profit for a gallon of gasoline in a cash sale is 15 cents, it’s easy to see how taxes play a large role in the gasoline market, however, neither the city nor county levy an additional tax on gasoline, so a difference in tax rate isn’t responsible for the price variation.

“It could be that your town requires a specific gasoline formula,” Kaganovich continued, “and this means that the regional refiner has to manufacture gasoline with a specific formula, and this means there may be less supply of your specific type as opposed to some other [type,] so that will affect prices, but I doubt that’s the case. That may be the case in Chicago or in California; they notoriously demand some specific formula.”

Posted on 2014 Nov 18