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But It Was 20 Cents Lower Just Yesterday!

 

Background

How many of us have gone to a gas station and found the price per gallon to have jumped dramatically since the day before? How many times have we gone to the market and found that the price of canned goods jumped significantly since yesterday?

It may be understandable that shortages of a commodity, caused by seasonal fluctuations or supply and demand forces, cause prices to increase over time. But sometimes, prices jump for no apparent reason. In some cases, an item that had been priced at one level when it reached the retailer has a higher price on it when it is made available for purchase, or even a higher price tag on top of an earlier price tag. The retailer’s cost for that can, or that gallon of gas, did not go up, since it had already been bought and paid for. In the case of fuel, the price allegedly is increased because the price per barrel of oil on the commodity markets has increased, either at the hand of international suppliers or because of disruptions at a refinery. Yet, that bears no relation to the gas that had already reached the gas station and been stored in the underground tank for the past few days. Yet, the practice continues.

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According to the American Petroleum Institute, about 55% of the price at the pump for gasoline is attributable to the cost of crude oil, 22% is due to refinery costs, 4% is due to marketing and distribution, 19% is due to taxes. Yet, none of these cost categories justify the gasoline price at the pump on any day reflecting the purchase price of a new barrel of oil that is entering the system. Furthermore, although a rise in the price of a barrel of petroleum causes the price per gallon at the pump to rise in tandem, a drop in the price per barrel does not cause a corresponding drop at the pump. The fact that prices decline only incrementally over time showcases the duplicity of the pricing practices. The oil companies (and, to a lesser extent, the gas stations) reap a windfall both when the price per barrel increases AND when it decreases!

Ideas / Solutions

The Federal government must put a stop to this practice. It is apparently not sufficient to rely solely on the conscience of a retailer to do the right thing. So, our government should solve this problem by mandating that a retail price increase based on the price increase of raw materials may not exceed the price increase paid by the supplier / retailer for the raw materials that went into the particular unit of the item that is being sold.

In the case of oil and gasoline, an especially strong argument can be made for this, because the industry already employs an accounting principle referred to as "last in, first out". Their use of this principle demonstrates that they are already fully aware of, and able to track, the cycle of crude oil coming into the system, and refined gasoline going out to market. Also, since the oil industry has the capacity to monitor this, there is no reason that packaged foods, lumber, and other companies cannot do the same.

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It should be obvious enough that a retailer should not be allowed to increase their price for already-purchased goods on the basis of anticipated cost increases on future shipments to that retailer. It is not acceptable to increase the cost of gas that is already being stored at the gas station on the basis of newly announced changes in the exploration and production costs at some remote oil field, or a fire at a refinery that will disrupt next month's shipments. Since the fuel has already been brought to market, future cost increases are irrelevant.

This is common sense. So, how can it be that highly paid businesspeople just do not understand this? Or, more likely, do they understand it very well? Do they just not care, preferring instead to use whatever excuse is convenient to bring in more revenue at the expense of consumers who don’t have any bargaining power?

Governmental institutions are already in place to prohibit this practice. The Federal Trade Commission already exists to police unfair trade practices. Their jurisdiction should be clarified or extended to cover situations such as this, both in response to a complaint, and proactively by their own investigations.

Another alternative is even more obvious: A little legislation outlawing such practices would go a long way for consumer protection.

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