A surprising unintended consequence of lower gas prices results in a higher disparity among gas stations, increasing the odds that consumers pay more per gallon.
A study of the past seven years of data by GasBuddy, a Boston-based provider of retail fuel pricing information and data, found that when inexpensive gas prices occur, it can often lead to a greater spread of prices in the market, especially in larger cities where there is more competition in the market.
The data demonstrated that when gas price reached its highs, such as in 2012,when the national average price rose to a record breaking amount of $3.61 per gallon, the price spread was confined to 95 cents between the most expensive 5% and the least expensive 5% of stations. When prices dipped to $2.13 per gallon last year, the spread increased a whopping almost 20% to $1.13 per gallon.
"Many people don't realize that over the course of 10 to 20 years, the amount of money they can save is significant," said Patrick DeHaan, a senior petroleum analyst for GasBuddy.com.
Consumers in major cities such as New York, Washington D.C., San Francisco, Los Angeles, San Diego, Seattle, Miami, Boston, Philadelphia and Chicago could pay upwards of an additional $60 each month if they are lax about checking gas prices, he said. San Francisco and Los Angeles came in second and third on the list, where drivers could spend upwards of an extra $1 per gallon. Prices starting their upwards movement on March 28 in many states, including Kentucky, Ohio, Indiana, Michigan, Illinois and West Virginia.
Drivers in metropolitan areas are more likely to encounter larger price variances because of the increase in competition among the various types of gas stations while those living in smaller towns or rural areas will experience less of a price difference.
"In smaller cities, there are fewer gas stations and less competition while the cost of doing business maybe lower also," DeHaan said. "Some consumers have a propensity to overpay because they don't look for the cheapest prices in the area and don't think about the bigger picture of how much they can save in a year."
Many factors affect prices at the pump, said Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University's Cox School of Business in Dallas.
"Drivers in most markets have many stations to choose from and will normally gravitate to the lowest price," he said.
An analysis of gas prices from January 1 to March 23 by GasBuddy showed that the largest spread occurred in Washington, DC. Drivers in the country's capitol paid a 35% difference with the top 5% most expensive station charging $3.42 compared to $2.22 in the bottom 5% of stations or a difference of $1.21.
Even in Texas where a large percentage of refineries are located, the spread is tangible with an 18% or $0.43 difference in Houston with prices ranging from $1.94 to $2.37 as well as a 16% spread in Dallas.
During falling price environments, consumers are often less price conscious, said Patrick Morris, CEO of New York-based HAGIN Investment Management. Demand is another issue because when gas prices are more expensive, people tend to drive less and buy more fuel efficient vehicles.
"Demand is more elastic at the top of the price range," he said. "When prices are at the lower end of the range, the impact is diminished and people actually drive more and buy less efficient vehicles."
The increased demand for gasoline, especially in dense urban areas with high fuel taxes, infrastructure limitations and strict environmental regulation often results in drivers paying a higher spread for access to the lower cost fuel, Morris said.
"If you look at San Francisco as a good example, the convergence of all of the issues above means that prices are generally higher in that city than anywhere in the country other than Hawaii," he said. "Like all retailers, the seller of gasoline knows that the demand elasticity drives sales so you make a fortune on low gas prices and a lot less on high gas prices to keep the volume of customers."