The Hidden Pattern in Gas Prices (And How to Beat It) | Diving In

You know the feeling you pull up to the gas station,
you know that oil prices have ticked up a bit,
and bang, the price sign has already changed. Then oil
prices come back down a few weeks later, and somehow,
the relief that lower price it just floats in like
a feather. This isn't just some random gripe. It's in
the news right now. Oil prices have been bouncing around
and Donald Trump just jumped on social media to accuse
the oil companies of not cutting gas prices fast enough.
He's called it price garging. Now that's a serious charge.
But before we decide who the villain is, let's start
by understanding that for no one and itself, you've got
to live with it every day. Because, mate, if you've
had the feeling that gas prices go up fast and
come down slow, you're not imagining it. Economists have been
studying this for decades. We've even got a name for it,
Rockets on the way up and feathers on the way down.
The pattern's real. It shows up in lots of places
over lots of years. But it can arise for several
different reasons. Some of them are pretty ordinary, others are
more worrying. So here's my plan for today. Does this
really show up and the data? Is this an empirical regularity?
Then let's get into it and ask why might it happen?
And finally, what does that all tell you? And what
doesn't it tell you when you're standing at the pump.
So let's start with the actual claim. Nobody's saying that
gas prices never fall. Of course they fall. The claim
is about how quickly when oil, which is a major
ingredient of gas, goes up, how fast does that show
up for you at the gas pump? And then when
oil prices go down, how fast does that show up
at the pump. That's the whole question for today, and
it's a good question because people really do notice oil
drops uply, there's sign barely budgets, and suddenly it feels
like someone somewhere is pocketing the difference. Now, look, I
don't want to jump from that feeling straight to a prosecution,
but I don't want to wave it away either, because
economists have measured this for a long time, and one
finding keeps showing up across a whole big literature. Retail
gas prices are often super responsive when crude oil prices
are rising, but they're not anywhere near as responsive when
they're falling. That's what we call the rockets and fairness pattern.
So this isn't just a question of good blokes and
bad blokes. It's a question of timing. Does bad news
travel through the system faster than good news? That is
something we can actually test. Okay, mate, So I had
stay to go fetch the weekly oil and gas price
numbers for me. I grab weekly US retail gasoline prices
from the EIA. That's the price they survey at the
pump first thing every Monday, and I lined up each
of those Monday pump prices again the previous week's average
crude oil price. Why the previous week, Well, because the
pump can only react to oil price changes that have
already happened. So we match this Monday's gas price to
the crew that came before it. The idea is simple.
What we want to do is take the weeks when
crude oil rose and separate them from the weeks when
crude oil fell. Then ask how much of each of
these movements showed up in gas prices at the pump
over each of the following weeks. That's the test nothing fancy.
We're just asking whether bad news travels faster than good news.
If you look at the data, the broad pattern, in
fact looks pretty familiar. Crude moves and then gas prices follow.
So specifically, I'm going to look at how gas prices
move over each of the eight weeks following a rise
in crude oil prices, and then how they move over
each of the eight weeks following a fall in gas prices.
Here's the punchline. When the price of crude oil rises,
the price at the pump, the gas price catches up
really quickly. Most of the move lands within a week
or but when the price of crude oil falls, the
relief shows up a lot more slowly. It dribbles in
over the following weeks. So yeah, we just confirmed it.
You and I. Gas prices rise like a rocket and
they fall like a feather. But give it a couple
of months, and I think this part's important, and the
two roughly even out. Eventually the feather does land. So
this asymmetry, it's almost entirely about speed. It's not about
whether the gas station pockets some permanent cut. So the
data have told us the pattern's there. The much harder
question is why is it there? Hey, That's where the
economics gets really interesting. There are several different mechanisms that
can create this. There's a bunch of useful stories. They're
very different stories, but they can each produce this same
broad pattern. The first story is that people notice bad
news faster than good news. So this is the consumer's
search story. When gas prices jump, everyone notices not so great.
I think that it's totally out of control. Is two
darn expensive? You notice? I noticed the local news notices
it's painful, it's salely. It becomes the topic of conversation
around the water cooler. But when prices drift down slowly,
different story, No siren. There's a bit of behavioral economics
going on here too. An unchanged price starts to look normal.
It just sort of sits there on the silene out
in the front of a gas station, looking familiar. Even
if the price of crude oil has fallen and that
price really ought to be lower by now, most people
don't know what the correct lower price should be this afternoon,
and a lot of drivers just keep buying from the
same station they brought from last week. That matters because
if consumers starts less aggressively. When prices are falling, then
stations can lower their prices more slowly without losing many customers.
In plain English, the stale high prices they pass as normal,
and that means that lazy buyers get soaked first few
times they buy gas on the way down. That's one mechanism.
I would you notice that's not a conspiracy theory. It's
not price gouging. Its just imperfect information, costly search, and
a little bit of human psychology. Although I also want
you to notice that it's you, the consumer, who gets
soaked as a result. Now let me turn to the
second story. It's the one that I think many people,
including the President's a spect straight away. It's called tacit collusion.
It sounds like a very dramatic term, but the basic
idea is pretty simple. Gas stations don't need to call
each other up or meeting a smoky alley in order
to agree illegally on keeping their prices high. That is illegal,
by the way. Instead, what they can do is just
watch each other. Look, my gas station can see the
sign on the gas station across the street. So when
the price of crudeles falling, both of those gas stations
face the same awkward question, should I cut the price
of gas or not? Hey, look, if I were to
cut the price of gas first the bike across the road,
he's going to see that immediately. He's going to match
me in about ten minutes. So if I cut the
price i'm charging, I'm only going to lose my profit
margin and I'm not going to win much extra business. Hey.
That's also if it's true for me, it's true for
him too. So that means I don't need to pick
up the phone and say to that blow, keep your
prices high. We both just sit there watching each other,
aware that it's not really a great idea for me
to cut my price if the other blow's going to
cut the price to match, and so that makes us
both slow to move gas prices when they're on the
way down. That's the TACIT collusion story. The tacit part
is we're not agreeing in a back alley, but it
still is collusion. The president be right to cause form
price gouging. The president if he wanted to, he could
use the safer textbook term call it tacit strategic interaction.
It's not an explicit cartel it's just firms behaving strategically
because I know they're watching me, and they know that
I'm watching them. Now here's the tricky bit. This story
is in fact plausible, but the pattern of price is
rising like a rocket and falling like a feather. That
doesn't prove it. Hey, there's a third story. Two. Some
of the lag may not be happening at the gas
station itself. It may be baked into the actual supply
chain leading up to the gas station. See the things
we're talking about the effect of arising the price of
crude oil into gasoline. But they're different things, and there's
a whole supply chain in the middle. Crude oil isn't gasoline.
It has to be refined and blended and shipped and
stored and delivered. And at each step the firms aren't
just responding to today's crude oil price. They're responding to
the cost of the inventory that they've already bought in
the cost of replacing it tomorrow. So when crude oil
prices jump, everyone in the chain knows that the next
shipment's going to be more expensive. That's a reason to
move the price up quickly. But when oil price is full,
things might move a little slower. Businesses might still be
selling gasoline that was refined from yesterday's higher cost crude,
or working through some built up inventory that they paid
more for last week. And if competition is weak at
any point along that chain refining wholesale retail, that gives
them even more room to let that decline just dribble
through to lower prices at the pump pretty slowly. Look,
it doesn't prove anyone did anything, or that anyone's innocent,
but it does mean that the symmetry that we're exploring
today can come from the structure of the market itself,
not just from what the bloke at the corner station
decides when he's changing his price. Science. So what you
need to actually do with all of this. First thing,
don't overreact to a short run in this match. If
oil fell yesterday and your local gas station hasn't moved yet,
that's not proved by itself that they're colluding to rob
your blind. The feather often does land slowly. Second, the
most useful practical lesson is about when information matters. You see,
when oil prices a rising, there's often not much you
can do. Bad news hits the market fast, by the
time you figured out that oil prices are moving, the
sign at your local gas station might have already moved.
But when oil prices are falling, well, different gas stations
don't always adjust at the same speed, and so that's
a time when it's going to be worth checking a
gas price app like gas Buddy, or glance at the
signs along your route home a little bit more carefully,
or compare a couple of the local gas stations instead
of just defaulting to the one that you always use.
You see, when the oil price falls, that's when the
information that you have is more valuable. Look, economics doesn't
always hand you a live hack, but today it does.
That live hack is search a little harder for the
gas you want to buy when oil prices are falling.
But beyond that, economics is also helpful because it'll help
you understand what you're seeing. So if prices go up
fast and come down slow, I want you to understand
that doesn't automatically mean that there's collusion among bad guys
coming out there. It could be that it could be
something else. If prices are high, gas prices are higher
even when oil prices are falling. It's true you the
consumer are getting soaked, So what's going on here? We've
learned to look at this as a market where timing, information, competition,
and the supply chain itself all matter. That is a
very economic way of thinking. You don't just ask what happened.
We're asking what mechanism could have produced it. And once
you do that, the world stops looking so random, and honestly,
sometimes it starts making sense.