Environmental Economics asks a question many of us have had:
Doesn’t it take longer than a day for oil to become gas?
Oil jumped to $78 per barrel yesterday. My wife paid $3.30 for gas this morning. I’m pretty sure it takes more than 48 hours for Middle East oil to become Columbus, OH gas. So what’s going on? In short, expectations matter. Prices are expected to go up in the future, so prices jump today. Is this greedy suppliers taking advantage? No just rationality at work.
And a commenter elaborates:
A gasoline retailer may have spent $2.50 for a gallon of gasoline sitting in his underground tank, but this is a (literal) sunk cost.
Why would he sell a gallon today for $3 if he expects the replacement cost to be $3.50 next week? Just holding the gallon will leave him $0.50 better off at the moment next week when his supplier finishes topping off his underground tank.
By the way, the price we hear in the news reports isn’t for Middle East oil. It’s for light, sweet crude delivered at Cushing, Oklahoma.
The answer: Because he will have to replace the gas in that tank at whatever the going rate is. He can’t replace a gallon of gas he bought for 2.50 with a gallon of gas that costs 3.00 using the profits he makes by selling it at 2.80 – not without going bankrupt.