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Price Asymmetry Responsible for Slow Decline

According to many experts, the reason why gasoline prices are rising much faster than they fall is due to an economic concept known as “price asymmetry” – perhaps better known as “sticky” prices. Back in 1999, the US Energy Information Administration found that “data confirms the notion that retail gasoline prices appear asymmetric, typically rising more quickly than they fall.” This phenomenon is certainly nothing new, but appears particularly frustrating to more and more Americans still struggling with weak economic growth and high unemployment.

An article in today’s LA Times attempts to account for the recent price surge in California, noting:

Since the state’s one-week price surge of about 50 cents a gallon, California’s average price for a gallon of self-serve regular gasoline has declined 3.6 cents to $4.623, according to the Energy Department’s weekly survey released Monday, and 6.2 cents to $4.609, according to AAA‘s daily survey. The two surveys use different methodologies but usually move in the same direction and report averages within pennies of each other.

The price surge, nicknamed “Gasageddon” by analyst Tom Kloza, started Oct. 1 with a power failure at Exxon Mobil Corp.‘s Torrance refinery. Ordinarily, the disruption wouldn’t have been a big deal because the plant was back to normal a few days later.

But based on updated statistics received Friday by the California Energy Commission, it became clear that the refinery went down when the state was near the bottom of its five-year averages in fuel supplies, fuel production and in the stockpiles of components needed to make the state’s expensive blend of clean-burning gasoline, said Gordon Schremp, the agency’s senior fuels analyst.

“We have seen low inventories like this, but we didn’t have a price spike then because we didn’t have another refinery problem,” Schremp said. “Here, we had a significant refinery problem.”

The Torrance refinery is the fifth largest of 14 gasoline-producing facilities in California. What’s more, the state’s third biggest refinery, Chevron Corp.’s plant in Richmond, has been in limited production since a fire in August.

That explains the rocket phase. The feather stage happens because once the crisis has passed “there’s always a reluctance among gas station owners to drop prices too quickly,” said Kloza, chief oil analyst for the Oil Price Information Service.

Another reason, Hahn said, is that the expensive gasoline has to be sold before cheaper supplies can be purchased.

This phenomenon of “downward stickiness” in the price of gasoline is yet another reason why locking in gas prices when they’re low would do so much to help small businesses as well as everyday people.

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