Why Am I Paying So Much at the Pump?

BY Paul Solman  March 12, 2012 at 1:32 PM EDT

gasoline pump
A gas station in Brooklyn, N.Y. Photo by Victor J. Blue/Bloomberg via Getty Images.

Paul Solman answers questions from the NewsHour audience on business and economic news here on his Making Sen$e page. Here is Monday’s query:

Name: Linda Crumback

Question: Why does the price of gas go up as soon as the price of a barrel of oil does? The oil you buy at that increased price does not hit the market for some time, so why are we paying a higher price for gas created from oil at a cheaper price? Who gets that extra money? An increase of 40 cents per gallon in less than two days is quite a profit for someone. Where’s the competition when they all raise their prices at the same time? Wouldn’t it be more competitive if one would keep their price lower? It seems the press doesn’t really have the oil companies explain what they are doing. Nobody is really digging. This is something that can really throw us, the people, into a real downfall, especially when it costs more to get to work than you get at work.

Paul Solman: OK, let’s think about this for a moment: How is the price of anything determined? The first place to look for an answer is the interaction of supply and demand. If lots of people want something and nothing else changes, the price goes up. If the supply of something shrinks and nothing else changes, the price goes up.

Now imagine that people only fear that the supply will shrink — the supply of insulin, say, because of — I don’t know — production snafus. Diabetics will pay more to ensure their continued to access to the medication, don’t you think? (For those of you studying for your micro finals, this is “low price elasticity of demand.”)

Why is it any different with oil? Fear of dramatic disruptions in the Middle East — an Israeli strike on Iran? — or suppliers holding reserves off the market because they think the price will rise as a consequence: Either of these will contribute to the fear factor. And the latter — holding down supply — is the whole point of OPEC, right?

If, as a consequence of these or other possibly imminent disruptions, you thought the price of oil would be higher tomorrow, wouldn’t you agree to pay more today? Wouldn’t that then drive up today’s prices?

In short, who cares what anybody paid yesterday — or last week, last month — for what they’re selling today? Is that how you’d price your house? Your Rembrandt? A barrel of oil, if it were yours?

As to who profits: The people who own the oil, obviously. But remember: They also lose when the price of oil goes down. The oil companies are easy targets and have been for more than a century. But I doubt they’re much different, in style or substance, than companies in any other industry, save for one key fact: We need their product more than we do most other things.

This entry is cross-posted on the Rundown- NewsHour’s blog of news and insight.