Marathon Oil Course Number & Name:

Relationship between retail price of gasoline and price of crude oil

In USA gasoline accounts for 50% consumption of petroleum products therefore it is closely monitored by public and research pundits. It is found that, there is asymmetric relationship (asymmetric defined: where one has much more power than the other or putting it differently, when two halves are not equal or same) between retail gasoline prices and crude oil prices -- particularly gasoline prices are more responsive to rising crude oil prices than falling crude oil prices. This is attributable to Market power, search cost, consumer response to changing prices, inventory management, accounting practice and refinery adjustment costs.

Basically, it's a competition that drives gasoline prices sharply upwards because of unspoken agreements between dominant players. When crude oil prices increases, gas stations increase the gasoline price and pass on to consumers immediately. In case of easing crude oil prices, they gradually reducing prices because at first one gas station decreases prices and attracts the public which forces other to reduce the prices to the same level because of competition. Location monopoly also favors gas stations to quickly pass on the prices to consumers and gradually passing the decrease on to consumers. After consumers have searched, the prices of gasoline come down to its competitive level and vice versa.

Refiners also confirm the above findings (asymmetric relationship). They also face huge adjustment cost to alter their output and gradually alter output. In case of low crude oil supplies, refiners reduce output quickly which result in sudden increase in gasoline prices and when crude oil supplies increases they gradually increase output because of delaying the decrease in gasoline prices.

The basic fundamental, Supply and Demand are also important in setting gasoline prices, when the crude prices increase in international market, gas stations adjust the prices of gasoline accordingly through passing price on to the consumer as the oil demand is inelastic. Weak...

employment data tolls on oil demand thus putting downward pressure on the prices.
Marathon price pump losing profits price crude increased 10%.

Marathon can use multiple strategies to keep the prices at the same level without losing profits. It can buy materials in bulk and getting discounts on it. It must make sure not to over buy because having tied up too much money in materials might hurt the cash flows position of the company.

Marathon can also use derivative products against the rising oil prices. It can use forward contracts to purchase the oil in future at low rates which eventually will give it cost benefit and huge profitability.

The company can get the benefit of economies of scale through running refineries at full capacity which ultimately reduces the fixed cost per unit.

The company can keep the prices at same level through cost cutting measures. For instance, companies can produce oil at lower cost through bringing latest technology like waste heat recovery plant and Refused Derived fuel (RDF) which uses wood, used tires etc. (waste products).

Marathon can also share building and ask some employees to work from their homes thus saving utility expenses and keep the prices at same levels.

Marathon can hire employees at low wage rate per hour. If it gives $40 an hour to an employee, it can have someone to do the same job at just $10 hourly rate. It will alleviate the cost.

Marathon should look at the options where it can shrink unnecessary or unimportant expenses. Like, does the gas station require the corporate office in the high rent district? Can they work with fewer employees rather than employee for every position?

Marathon can also use the strategy of Co-op. In this strategy, it can join forces (other oil companies) and buy large quantities of material at a lower cost instead of buying alone.

As the marathon has its own exploration and production facility, it should reduce the exploration and production cost through using Research and Development and latest technology, which will eventually help the company…