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Why gas prices are so jumpy
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Gas prices change a lot. At this station, prices jumped to $2.20, and fell to $2.02 within a few days. (MPR Photo/Bill Catlin)
If you drive, you're undoubtedly watching gas prices. They change a lot -- sometimes more than once a day, and mostly upwards over the past several months. Last week, Twin Cities gas prices jumped 20 cents a gallon, to $2.20 in many cases. They've fallen since then, but that got us wondering about why prices change so much.

St. Paul, Minn. — It comes down to crude oil and competition.

Competition is supposed to keep prices from spiraling out of control. "So, where's the competition?" you ask, when gas prices are hovering around the stratospheric price of two bucks a gallon in Minnesota?

Well, it's there. People react to even small differences in the price of gas. Just ask Scott Olson.

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Image Lots of competition among gas stations

"One, two cents a gallon. People will go anywhere for a cheaper gallon of gas," says Olson, who owns Parkway BP Amoco at the corner of I-35E and Wheelock Parkway in St. Paul.

A block away, there's a Mobil station. Across the highway, a Sinclair station. Three gas stations located within a minute's drive of each other.

Olson sets his own prices, and says he loses business if he gets out of line with the competition.

"The last thing you want to do is see your customer go somewhere else, for a penny or two cents a gallon. That's the reason why we're jumping all over the board most of the time," says Olson. "Maybe the competitor across the street is selling it five cents cheaper. You're going to have to meet him five cents cheaper, even two cents cheaper, even a penny cheaper, you're going to have to meet that."

Olson reduced his price by 18 cents over just a few days. So competition can drive prices down. Why do they go the other direction? Olson says prices can ratchet down to the threshold of pain, and that can send them soaring again.

You get so close to cost, that everybody gets down to that cost, where you're giving gasoline away with the credit card fees and everything like that, something has to happen.
- BP Amoco station owner, Scott Olson

"You get so close to cost, that everybody gets down to that cost, where you're giving gasoline away with the credit card fees and everything like that, something has to happen," he says.

Olson says that's what produced the big spike in prices late last week. He says SuperAmerica, the big gas and convenience store chain, usually initiates the push back up in the Twin Cities. According to a 2002 report by Attorney General Mike Hatch, SuperAmerica sells the most gas in Minnesota.

Officials with Marathon Ashland Petroleum, the chain's parent company, say only that sometimes they lead prices, sometimes not. But spokeswoman Linda Casey confirms that prices sometimes jump because someone cries, "Uncle!"

"I can't keep not making a profit, or I'm going to have to shut my business down," says Casey. "So I have got to raise [my prices] and hope the other competitors are in as tight straits as I am, and they're glad to see me go up, because they're going to come up with me, and try to recover some of their losses as well."

Casey says Speedway SuperAmerica's headquarters in Ohio sets prices for SuperAmerica. She says the cost of acquiring gasoline is a major factor in the price. The local competition is, too.

The company's St. Paul Park refinery had to shut down recently for repairs. But Casey says the increase in retail gasoline prices last week was predominantly due to increases in the cost of crude oil, which generally accounts for about half the cost at the pump.

With crude prices hitting new highs last week, she says the price of gasoline would have jumped regardless of the problems at the refinery. Think about running a lemonade stand, she says, and watching the price of lemons going up at the grocery store.

"In order to have cash in hand to pay for those lemons for tomorrow's supply, you've got to raise the price of the lemonade you're selling today," says Casey.

But Mike Derickson says the shutdown did affect prices. Derickson sets wholesale gasoline prices for Inver Grove Heights-based CHS, which sells gas under the Cenex brand. He says when a refinery goes down, and it happens often, the market anticipates tighter supplies, and that can quickly boost prices.

"When there's a hiccup along the way, that ripple effect works its way through the system so much quicker than it did in the mid-'80s, when you had declining demand in the U.S. and you had surpluses," says Derickson. "And, you know, we don't have that anymore."

Derickson and others say demand for gasoline has grown and U.S. refining capacity has shrunk, with no new refineries planned. That's made the U.S. a net importer of gasoline.

Twin Cities prices have eased somewhat since their spike last week, and markets are anticipating some declines in crude and wholesale gas prices. But with the summer driving season ahead, there's little reason to think gas prices will be plunging any time soon.

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