The price of gasoline is rising in Wichita as gas stations try to regain some of the profits they lost because of low prices in June, an expert says.
Many stations in Wichita were heading to $2.65 for a gallon of regular gas Thursday after prices were at $2.49 or $2.51 Wednesday.
Wichita is one of the few cities in the U.S., most of which are in the upper Midwest, that experience “price cycling,” according to senior petroleum analyst Patrick DeHaan at GasBuddy.com. This means that gas stations will compete and drive the price down slowly. Then at some point, the gas stations will raise their prices more quickly so they can make money on gas again.
“Stations compete, they undercut each other,” DeHaan said. “One station may drop a penny, then the other. It becomes a war at the pump, up until they can’t lower prices anymore and they lose money.”
That’s what happened in June, he said. Even as the cost of buying oil and gas from refineries rose, the cost of gas remained steady for drivers in Wichita. But this week some stations started raising their prices.
“Stations are getting squeezed on what they make per gallon so they are probably changing their prices to a margin that is more acceptable, maybe 15 or 20 cents a gallon,” DeHaan said.
Over the long run, in markets such as Wichita that exhibit “price cycling,” customers can expect to pay about 1 cent less per gallon, Federal Trade Commission studies have shown.
An FTC study in 2010 singles out QuikTrip as one of the main drivers of these pricing cycles. It says that because QuikTrip owns a large enough share of the market, it can raise its prices without the same risks as smaller gas stations, which then allows all the smaller stations to raise their prices as well. But gas stations start lowering their prices by small amounts, in order to sell more gas, and the prices fall again – until QuikTrip uses its market power to increase them again, in a cycle.
The study also says that smart customers who pay attention to prices and time their purchases well at the bottom of the cycle can basically buy gas without the gas stations making any money off of them.
People are consuming more gas than at any time since 2007 because of the low prices. “It’s the lowest summertime price we’ve seen in five years,” DeHaan said. “People are itching to get out there. Gasoline demand is through the roof.”
Gasoline demand is 4.5 percent higher so far this summer compared with last summer and 3 percent higher the first half of the year, according to the Energy Information Administration.
“Americans are driving more this year due to lower gas prices and a stronger economy,” said James Hanni, executive vice president for AAA.
Normally in the summer, the price of gas goes up because so many more people are driving, Hanni said. The higher cost of gas could also be due to supply problems at regional oil refineries, according to AAA.
Even though they are driving more, Hanni said, Wichita drivers are saving money overall because of lower gas prices. He said Americans have saved about $65 billion on gas so far this year compared with the first six months of 2014, which is more than $530 for every U.S. household on average.
Costco’s new gas station could have had some effect on keeping prices low in June, DeHaan said. As of Thursday morning, Costco’s gas cost 20 cents less than the city’s average. Because Costco requires a membership card, it’s not as direct a threat to other gas stations, but some stations may have tried to keep their own prices down to prevent drivers from getting into the habit of buying from Costco.
“People love low gas prices,” DeHaan said. “Costco will spend a couple of thousand dollars on lower gas prices rather than advertisements. If they have the lowest gas price, people will say, ‘I’m going to Costco.’ People will go there for gas, then say, ‘I’m going to get some salsa, I’m going to get a slice of pizza.’”