Supply, Demand Drive Gas Prices Inching Toward Record High

With gas prices at the pump on the rise again, many people have been asking how the price is determined.

Prices in the Madison area are just a tick below the national average of $3.81 a gallon — about 21 cents shy of the record high seen in May of last year.

But as many worry what higher prices now might mean when summer arrives, questions of how local gas stations determine what to charge at the pump arise.

Station owners cite fundamental principles of capitalism, namely competition brought on by supply and demand.

“It’s very simple,” said Ed Francois, owner of Citgo on Gammon Road. “We look up and down the street, or we have a region, or a marketplace, that we take a look at.”

Fancois, a third-generation gas station owner, said many of the pricing strategies of local, neighborhood stations comes down to competition.

“We watch each other and we try and establish our price to be equal to theirs because customers have so many choices for fuel right now,” he said.

Erin Roth, executive director of the Wisconsin Petroleum Council, said the higher prices are really putting a squeeze on local retailers.

“Retailers have to anticipate what the next load of gasoline is going to cost them,” Roth said. “And when you have escalating prices in terms of crude oil and wholesale prices, it can change on any given day.”

After the cost of crude oil, refining and taxes, 6 percent is left for gas station owners, like Francois.

For his station, where regular unleaded gasoline is $3.79 a gallon, he makes 22.7 cents for his operation.

As summer approaches, the rise-and-fall of gas prices are in flux because of the volatility of the market, Roth said.

Historically, these high gas prices have affected driving habits. When fewer people are driving, prices come down because of the decreased demand, he added.