Rockets and Feathers Explains Why Gas Prices Go Up Faster then They Come Down

The price of oil has dropped over $20 a barrel from a high of $146 to $123 dollars this morning. That represents a 16% drop in gas prices. I remember that when the price of oil was rising, gas prices were going up almost daily. Yet on my recent survey of gas stations, I've seen modest decreases in price, but certainly nothing approaching a 16% drop or even a 10% drop. Based on the price of oil, gas should be selling for around $3.20-3.40 a gallon for regular unleaded. I see prices in the $3.89 to $4.00 range.

Why is that? The reason the prices are still high is explained in the Rockets and Feathers theory proposed by Mathew Lewis, an associate professor of economics at Ohio State. Basically prices go up because gas stations are passing their cost along to consumers. They can't raise them too high because consumers are vigilant about looking for the best deal. Think about it, when prices rise you look for the station that is 3 cents below their competitor. Gas prices are on your mind. But once the price of gas begins to drop, consumers relax their shopping and become less concerned about saving a few pennies. Looking for the best price is no longer as important because prices in general are coming down. This, puts less pressure on the gas companies to compete to lower prices. As long as they lower prices by a few pennies here and there, consumers are generally happy.

It's the reason why it can take up to 8 weeks for gas prices to adjust to a lower price in oil.

Consumers can help drive prices lower by remaining vigilant and seeking out the best price. If gas stations are forced to compete then they will have to lower prices faster.