Bryan Caplan  

Maybe the Variance of Gas Prices Actually Has Increased

An Anarcho-Capitalist Tranzy?... The End of the World...

People seem to be searching harder for bargain gas prices. But according to search theory, the reason to search is price variation, not price. On closer examination of pump prices, though, I want to retract my observation that gas price variance is constant. Just yesterday in Arlington, I noticed a $.40+ spread between two gas stations just three blocks apart. (Anyone know of more systematic data?)

The last time I noticed spreads this big was the week after Katrina. So what's going on? The simplest answer is that some gas station owners take popular perceptions of unfairness into account when they set their prices. Either they buy the popular view, or they think it's in their long-run interest to pander to the popular view. So while most stations mark prices to market, a few grit their teeth and endure some short-run losses. It won't last, of course; in a few months the "fair" stations will either swallow their scruples or go out of business.

Adding confusion to the mix: some stations (but far from all) are starting to display prices with a cash discount already factored in. So the prices you see out of the corner of your eye as you drive by are becoming less comparable.

But at least we still don't have rationing; don't miss Don Boudreaux's 70s flashback:

The average price of a gallon of gasoline in 1979 was (in 1979 dollars) 90 cents. So if a worker in 1979, earning that year's average hourly wage of $6.19, spent one hour waiting in line to buy five gallons of gasoline - a standard maximum amount that filling stations would sell to customers during periods of shortage - he would have spent, waiting in queues, $1.24 worth of his time for every gallon he bought. The total cost per gallon to him would have been $2.14 ($0.90 in cash expense plus $1.24 in time expense). $2.14 in 1979 was worth about $6.36 of today's dollars -- a cost per gallon much higher than the roughly $4 that we Americans now pay (without having to queue up for the privilege of filling our tanks).
Scary. Two and a half months ago I predicted that we'd get them once gas hit $5.50. Now I think I'd say $6.25. Anyone else care to update their predictions?

Comments and Sharing

COMMENTS (13 to date)
matt writes:

From my experience if a gas stations prices are more than 5cents off the average of the neighborhood something fishy is going on.

I know how big my car's gas tank is, and I pay strick attention to my milage, owning a hybrid (civic) and using some simple driving techniques to stay over 45 mpg. When I first got the car I used the gas station closest to my old apartment it was the cheapest and when I filed the tank it would take 13 gallons. The milage computer was showing about 515 for tank and 44 mpgs. Doing the math, that works out if my car only had a 12 gallon tank.

The instruction manual for my car says there is only a 12 gallon tank. I started going to another gas station and low and behold my car only takes 12 gallons to fill up.

Was the first gas station cheating me, maybe, there pumps were giving .93 gallons instead of 1.00, how many people would notice that, could it just be weather realated heat/volume issues I don't know, but my guess is they were ripping people off because they can.

Moral: you always pay the market price even if you don't it.

Gary Rogers writes:

I am still convinced that the unintended consequences of the Global Warming believers has kept us from having gas lines. Higher gas prices mean we consume less gas, which is a good thing for the GW crowd. Politicians that would normally take the popular position of holding prices down now have a good part of their political base that is saying don't mess with a good thing.

Pedro Bento writes:

All of these casual observations about gas prices may tend to seem contradictory, because each area of North America exhibits very different behaviour.

Cash prices in San Diego have been posted for at least 3 years. Similarly, I noticed differences of at least 30cents between 2 gas stations that were 1 block apart just as long ago (I'm thinking of 2 stations on Ingraham between Grand and Garnet).

Prices in Toronto tend to stay within a 5cent/litre spread. But in Vancouver, they vary (within the same gas-tax jurisdiction) by 10cents on a regular basis. (As an aside, Vancouver's gas prices are the weirdest I've seen - every station charges a price 2-3.5 cents less than their posted price, and this discount varies across stations)

Good luck getting systematic data.

Don Lloyd writes:

Even if every consumer considered every brand of gasoline as perfect substitutes for one another, the individual station operators will still generally have little or no choice of supply, or maybe even supply schedule.

This implies that the most important consideration for a station operator is the time and cost of his next supply shipment, and the fuel level of his underground tank.

The price per gallon charged must be sufficient to be at or above the expected replacement cost of the next shipment and must be sufficient to keep the underground tank from being emptied before the next shipment.

Since these two conditions are likely to be highly variable between stations and over time, the variation in local gasoline price seen is almost entirely a function of effective consumer sensitivity to price differences.

At less than 5000 miles a year of driving, maybe 250 gallons total in local errands, gasoline costs are less than the sum of auto lease and insurance payments, so the relatively small differences in pump prices relative to convenience can be ignored.

Regards, Don

Joe writes:

After reading this I poked around a little for sources of price information. This site seems decent:

Jesper writes:

Why would you ever get rationing or price controls again? We poorer Europeans live happily with gas prices of around $9/gallon due to taxation. You can too.

If you (slowly) crank gas taxation up to our levels, you would go more fuel efficient and some of the difference between production cost and selling price of oil would end up in your tax coffers instead of in arab scheik hands. You would simply, but somewhat counterintuitively, save lots of money. What's not to like?

Lance writes:

I believe the variance is just based on the timing of when the gas is supplied to the individual gas station, as Don alluded to.

So the gas station with a higher cost per gallon, beyond normal deviations due to additives the gas station may add(like Shell), may have a lower supply of on-site gasoline and/or a longer period before they receive their next shipment. In addition, they may expect that next shipment to be more costly than their previous shipment was.

Brad Hutchings writes:

@Jesper... And we would all drive little clown cars. No thank you. What keeps America great is that we don't ever try to be like Europe. That's not my original opinion (although I share it). That's what my European friends tell me.

@Bryan... I'll believe gas is too expensive to continue to let the market rule price when the line for $8 automated car washes at the local Shell station disappears. Skipping the wash is the easiest way to take $.50/gallon of the effective price of a trip to the gas station. And people aren't that cash strapped yet.

Jesper writes:

Brad: Hmm... Cool guiding principles you have there: "No clown cars" and "ignore good ideas if from Europe".

However, the era of cheap fossil fuel is slowly coming to an end whether you like it or not. You yanks are already abandoning your non-clown cars and GM is posting enormous losses while throwing all it has got on Chevrolet Volt in a desperate attempt to avoid total irrelevancy.

I think Europe is much better prepared for peak oil. We have denser cities, smaller cars, more public transport and a public that is used to expensive gas. That means we aren't as hard hit as you are by increasing prices, and we have the option to stabilise them by simply lowering taxes, and we will go electric long before you. Just as with mobile penetration and Internet connectivity, you Americans will be sidelined, again.

aaron writes:

For your reference, Trends in Fuel Efficiency.

Fuel Efficiency is higher now than back in 1998. Efficiency Declined from 1998 unitl the end of 1999 and then improved quickly. It remained relatively flat until 2004 and then began improving until the middle of 2006. Since 2006 fuel efficiency has been in steep decline.
Brad Hutchings writes:

Jesper, we aren't as terribly hard hit by seasonally high gas prices as you might think. Yes, there are more teenagers and low wage workers at bus stops. No, traffic hasn't disappeared. Yearly mileage is down 10 billion miles, which represents just a 4% from last year due to $4+ gas.

Bryan asked when price would become such an emergency due to price level that government would impose price ceilings and rationing. I'm saying it's got a ways to go based on my observations of what people still do. I think you could actually find a comparable past precedent... how the price of insurance (on a per mile basis) led to Prop 103 insurance "reform" in California. I doubt we're anywhere near the preceding price growth rate with gas, and I'd expect an elected national legislature to be less radical than a California initiative.

aaron writes:

I calculated monthly Miles Per Gallon using Vehicle Miles Traveled from the DOT and Gasoline Consumption from EIA. The calculated MPG is high, either DOT over estimates VMT and/or EIA under estimates gasoline consumption. But the important thing here is the trend.

I also plotted gasoline Price vs MPG.

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