Gasoline prices work in mysterious ways

What goes up must come down. That’s an immutable law of physics and — so it seems — of gasoline prices as well.

Just a few years ago, we were cringing at the pump as the price of regular unleaded gasoline crossed the $4 a gallon threshold. It was enough to send my wife and I to the Prius dealer.

Today, the price of gas has fallen to ... well, that’s a good question, isn’t it? What is the price of a gallon of gas in Miami? And why does it seem to vary block-by-block and service station to service station?

Recently I was driving around on fumes and needed to make the 30-mile trip from Miami Beach to Fort Lauderdale-Hollywood International. So I jumped off highway 195 and filled up at the Shell Station on the corner of Biscayne Blvd and 36th Street. The price: $2.99 per gallon.

The next day, I was driving past the same gas station on my way to Wynwood. And guess what, the price was down to $2.89, a 3 percent price drop in just one day. I could have saved $1.80 for a full tank in my Subaru. OK, I thought, no big deal.

But as I headed east on 36th Street toward Northeast Second Avenue, I passed a Valero station offering gas at $2.19 per gallon, a whopping 80 cents less per gallon than I had paid half a mile away the day before. That difference was significant. I would have saved $14.40, or 27 percent, on a single tank of gas.

At first blush, it makes no sense. As far as my car’s engine is concerned, it’s the same gas. Both stations are subject to the same Florida gasoline tax. The distribution costs from Biscayne Boulevard to Northeast Second Avenue are about the same. Maybe Shell spends a penny or two more per gallon on marketing than Valero, but not more than that.

So why the 80 cent differential? Turns out there’s more behind the price of a gallon of gas than the vagaries of global demand, economic sanctions against oil-producing nations, and advances in hydraulic fracturing technology.

Gas prices at the pump vary widely for two reasons. The first has to do with the nimbleness of small, independent businesses. The second has to do with the sophisticated analytics large companies can bring to their pricing strategies.

Off-brand service stations, such as Valero, have a wide range of fuel they can buy, they get quotes from multiple suppliers and they keep less inventory in their underground tanks. So, when the price of gas is falling quickly, they can jump on opportunities more quickly. And, given that their main marketing proposition is lower prices, they pass their savings onto consumers as quickly as they can.

Branded service stations, such as Shell, Exxon and Chevron order gas from their corporate parent, and each location is subject to “Zone Pricing” strategies based on a complex weighting of factors, such as the number of competing stations, how many vehicles pass by on any given day, proximity to on and off ramps, relative wealth of the local population, and more.

As a result, even within the same brand, my Shell station on the gridlocked corner of Biscayne and 36th charges much more than a Shell station in Doral, well past 826, and both of their prices are dwarfed by the Shell station near the car rental return at Miami International Airport.

Of course, as I think about it, this has been going on forever. Years ago, I remember my Dad indignantly peeling out of a gas station charging 33 cents per gallon in order to pay 29 cents per gallon across the street.

So my advice: With oil prices coming down, enjoy the $2-ish price per gallon gas at Miami’s off-brand, off-the-beaten track service stations while you can. What goes up must come down. But with gas prices, what comes down must eventually also go up.

This story was originally published February 1, 2015 at 2:00 PM with the headline "Gasoline prices work in mysterious ways."