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February 27, 2007

Ups and downs in gas prices

Why does it seem that when oil prices rise, gas prices go up almost immediately -- but when oil prices drop, it takes a while for prices at the pump to fall? N.C. State University economist Mike Walden explains.

"Economists give a couple explanations here: One is that when oil prices are on their way up and gas prices are also on their way up, people will start to top off their tanks," he says. "So they are going to try to buy gas more frequently because they fear that ahead the price is going to go higher in a couple of months.

"And what that does is it increases demand, and it actually becomes a self-fulfilling prophecy because that increased demand pushes prices up even faster," adds Dr. Walden, a professor of agricultural and resource economics.

"Now on the downside, two things may delay the drop in the price at the pump: One is that it takes time for people to shop around and get the best bargain. You get locked into buying gas from a certain place, and when prices fall you don't get out of that mode very frequently, and so that sort of gives your local buyer kind of like a little monopoly so he will not have to lower his price as fast.

"The other thing that happens is again when prices fall, demand increases," he concludes. "And that also slows down the drop."

Posted by deeshore at February 27, 2007 08:00 AM