Saturday, March 12, 2022

Pricing Gasoline

The price of a barrel of oil has shot up due to the Ukraine/Russia War and many felt the sting at the gas pump. This story at NBC News interviewed an owner of three gas stations in Texas who said he is losing money with the price increases.

“We’ve raised the price of fuel as little as we could [and] absorbed the price increases to cut into our profits,” he said. “On Friday, the wholesale price went up 21 cents. … Our price at the pump went up 11 cents.”

This indicates about a 52% pass-through of a change in industry marginal costs to prices, at least in the short-run. Slightly more of the burden of the cost increase falls on consumers with the rest falls on gas stations. The size of the pass -through is determined by both demand and supply elasticities. Perfectly elastic demand would generate a 100% pass-through while perfectly inelastic demand would generate no pass-through. This is somewhere in between and is consistent with recent estimates of the elasticity of demand for gasoline of -0.37.

2 comments:

  1. Excellent example, Michael.
    You have the perfectly elastic-inelastic demand statement backwards, though. When it's perfectly inelastic (vertical), is when the pass-through is complete (100%).

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