What zooms up, comes down slowly

Gasoline: Nature, consumers and Adam Smith make prices erratic.

September 18, 2005|By Paul Adams | Paul Adams,SUN STAFF

Motorists tired of waiting for gas prices to come down in the wake of Hurricane Katrina will be happy to know that, after years of study, economists have all but proved what most car owners have known all along: Fuel prices go up much faster than they come down.

In academic circles, this is known as the "rockets and feathers" syndrome. Gasoline prices tend to "soar like a rocket" in times of turmoil, such as after a natural disaster. But they "fall like a feather" when markets return to normal, the observation goes.

Theories vary as to why this happens, but economists say it has much to do with the vagaries of the nation's fuel markets, which are routinely buffeted by a volatile mixture of politics, natural disasters, erratic consumer behavior and the unforgiving forces of supply and demand - guided by what 18th-century Scottish economist and philosopher Adam Smith described as an "invisible hand."

Though its existence has been debated and studied for years, the "rockets and feathers" phenomenon has been much more noticeable this month because of the unprecedented systemic shock the recent storm delivered to the Gulf Coast and to the nation's fuel markets.

"It's a phenomenon we have long observed in gasoline markets, and it's actually pervasive throughout the market for gas," said Stephen Brown, director of energy economics at the Federal Reserve Bank of Dallas.

"From crude oil to the spot market for gasoline to the wholesale price to the pump price - we see this `rockets and feathers' in every step of the production chain."

On average, it takes eight weeks longer for prices to come down than it takes for them to go up, Brown said. The same pattern has been seen in overseas markets.

It took less than a week for the average price of regular unleaded gas in Maryland to climb 23 percent from $2.66 per gallon on Aug. 31 to $3.27 per gallon Sept. 6, just days after Katrina wiped out oil and gas production in the Gulf of Mexico and temporarily shut down two major pipelines that provide more than two-thirds of the gas to the Baltimore-Washington market.

Today, the pipelines feeding Maryland are back up, though some of the refineries serving the Mid-Atlantic are still out of commission.

Gasoline futures fell Friday to $1.78 per gallon in trading on the New York Mercantile Exchange, or Nymex. That was down 39 percent from the post-Katrina peak of $2.92 they reached on Aug. 31.

Still, the average pump price of unleaded in Maryland remains at $3.07, down only about 6 percent from the peak more than two weeks ago, according to the AAA motor club. The state is tied for seventh among the most expensive gas markets in the nation.

"I remember that when we were driving through one morning, it was like $2.99 in the morning and $3.49 by afternoon," said Becca Pearce, a Federal Hill resident who commutes to her job in Owings Mills.

The price recently dipped back down to just under $3 at the Royal Farms store on Key Highway where Pearce, 33, stopped to fill up her Honda Civic Hybrid last week.

"They've taken a long time to come down, and I don't know why," she said. "I think people were freaking out, and obviously we're still having a supply issue because we still haven't gotten all the refineries up in the gulf."

Industry experts say the increase was driven in part by a huge jump in wholesale gasoline prices - the price that retailers pay for inventory - and a spike in crude oil prices.

At the peak of the crisis, wholesale gasoline soared by close to 90 cents in just days, said Michael Burdette, a senior analyst for the Energy Department. Crude oil briefly touched $70.85 per barrel but has since declined to slightly more than $63.

Some experts said one reason for the slow decline is that retailers are trying to make up money they lost after the hurricane, when wholesale prices for gasoline soared faster than many could raise prices at the pump. Nationwide, retailers increased their prices by about 44 cents to 46 cents, while the price they paid refiners for inventory climbed by nearly twice that amount in some markets.

"Some suppliers got squeezed pretty hard [after Katrina] and so it's possible they lost a lot of money, and now you may see some of them try to recover some of that," said John Felmy, chief economist with the American Petroleum Institute.

Some blame the nation's refining industry, which is controlled by a handful of companies. No major refineries have been built in the United States since 1976, though several have undergone major expansions.

"By and large, the retailers are the most competitive part of the industry," said Mark Cooper, director of research for the Consumer Federation of America. "Refineries are the real bottleneck in America."

Felmy, the petroleum industry economist, disagreed, saying the small number of players in the industry are very competitive.

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