Thursday, June 19, 2008

It's About Supply and Demand. Really?

Here's a paradox to consider: If the price of gasoline is really driven by supply/demand fundamentals, why is the price of premium unleaded more than regular? Can anyone claim that there is more demand for premium than regular? The obvious answer is no. As a matter of fact, a report just out today highlights the substantially decreased demand for premium fuel.

As drivers shied away from premium gas to cut cost, premium gasoline consumption dipped to a 24-year low of 35.6 million gallons of gas daily, the USEIA said. As a result, it takes gas station owners between three to four weeks to dispose of their high-octane inventory, while more inexpensive regular gas runs out in a few days.
Still, the price is well over 30-40 cents more than regular grade.

Just another sign that supply/demand fundamentals are no longer the dominant factor in what we pay at the pump.

UPDATE: One might argue that the cost of refining the higher grade fuel should obviously create a price premium over lower octane8 fuel. That's certainly a fair argument, however, the point of this discussion is that one would expect the lower demand commodity, regardless of production cost, to decrease (in price) relative to the high demand alternative.

2 comments:

Anonymous said...

I am not a market guru or financial analyst, but I don't buy your thinking here. You are comparing a higher grade of fuel against a lower.

Can you validate your claim by referring to any expert analysis?

Scott said...

Sure, what I'm saying is this, the price disparity between regular and premium has remain unchanged despite the fact that the demand for premium has dropped substantially more than the demand for regular unleaded. The referenced story points this out.