F... gas prices

[Schneed10]

Originally Posted by Beemnseven

Let's look at it from another angle. Say you're a bread store owner, and another natural disaster has created a shift in supply and demand that will greatly affect the price of bread -- maybe it's wildfires across the wheat fields of the midwest.

As the bread store owner, you see that since the wildfires have consumed a great portion of available wheat, you have to take action. Even if you have just received a full shipment of bread at normal market prices, you know the next shipment will cost much more. Since you have to pay for overhead, pay your employees, pay the onslaught of federal and state taxes associated with doing business, plus a little for yourself (you're not doing this for free, right?) you know that if you charge the same amount for the bread that you did before the wildfires, you will not be able to afford the next shipment without going out of business. So what do you do? You have to increase the price of the bread that you've already got stocked on the shelf in anticipation of the rising cost of bread that is sure to ensue.

The same thing is happening with mom and pop gas stations, even franchises all over the country. The evil, cold-hearted "Big Oil" companies are often the target of scourn and ridicule, but in reality, it's all a part of supply and demand folks.

This is exactly right. Gas stations actually use the futures contract on crude to guage the appropriate price per gallon for that day. The daily % increases in the futures contract on a barrell of crude tell the gas station what % increase they should apply that morning when they open the station.

Futures prices factor in future expectations for supply and demand. So when a hurricane appears in the gulf, and is forecast to head for the oil refinery regions, the futures price jumps up in anticipation of a negative shock to supply. Gas prices basically follow the futures contract of crude oil.