Secret at the pump: Why Indiana gas prices jump suddenly for no apparent reason

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INDIANAPOLIS (WTHR) — For years, Indiana gas prices have been on a rollercoaster ride for no apparent reason. The price you see at your corner gas station in the morning frequently jumps 30 - 40 cents by the time you head home in the afternoon.

It just happened again. The price at central Indiana gas pumps shot up last Tuesday – by as much as 54 cents per gallon at some gas stations – even though the price of crude oil went down that same day.

The sudden, unexpected price jumps drive Hoosier motorists crazy.

“They just spiked up for no reason- it doesn't make any sense”

"Beyond crazy," said Susan Ellington of Noblesville, who filled her gas tank just a few hours after the price of gas jumped from $1.81 to $2.35 at a Camby gas station. "I don't understand it," she said.

"Very frustrating. I don't how to explain that," agreed Penny Elmore of Mooresville.

"They just spiked up for no reason. It doesn't make any sense," added Leo Hosler, who spent an extra $9.64 to fill the tank of his Dodge Caravan after the price spike caught him by surprise.

So what's going on here?

As Hoosier motorists have been pumping over the past three months, 13 Investigates has been closely tracking prices and getting answers to explain the frequent price spikes that seem to have little or no correlation to current events, weather or world markets.

The truth is frustrating -- but also fascinating -- and once you understand what's really happening, you'll likely never see gas prices the same way again.

"Most people just don't get it. They see it as a big mystery," said Scot Imus who runs the Indiana Petroleum Marketers & Convenience Store Association. "It's really a buying opportunity for consumers, but they're not really aware of it."

"Yeah, it really is an opportunity to save hundreds of dollars a year," agreed Patrick DeHaan, a petroleum analyst at gasoline industry watchdog GasBuddy. "This is very predictable, and if you understand it, you can beat gas stations at their own game."

A terrible "game" for the industry

That "game" happens every day in Indiana as gas stations compete for your business. Gas retailers constantly engage one another in neighborhood price wars, dropping their gas prices a few pennies at a time (sometimes several times a day) to lure you to their gas pumps.

Patrick DeHaan, Gas Buddy petroleum analyst

"Stations in Indianapolis are constantly undercutting each other – essentially a price war every day," explained DeHaan. "It takes a week or so for those stations to drop their price so low that they're losing money. And then somebody will wave the white flag and they'll both raise their price again." That's when we get socked with sticker shock at the gas pump as gas stations reset their prices to a more profitable level.

The strategy is called "price cycling," and it happens in central Indiana, on average, every 10-12 days. Midwestern states like Indiana are the only places in the country where this occurs.

In most other states, prices rise and fall more slowly and steadily based on the wholesale price of gasoline and oil. According to the National Association of Convenience Stores, those gas stations set their prices to reflect an average markup of about 20 cents on each gallon of gasoline. (After expenses, which include credit card fees, labor, rent and other costs, a retailer's gross profit from a gallon of gas averages about 5 cents per gallon.)

But in Indiana, price cycling means frequent, dramatic price swings that often have nothing to do with the traditional pricing factors that impact the price of gasoline. Rather than a steady 20-cent markup, Indiana gas stations may go days with only a 4- or 5-cent markup as they try to undercut or match competitors, then spike their prices to collect a 35-cent markup that helps recoup profits lost during their ongoing price war.

Unaware of the pricing strategy, most consumers hate the unpredictability of the price fluctuations – and so does Imus.

Scot Imus, Executive Director Indiana Petroleum Marketers & Convenience Store Association

"For our industry, it gives us a huge black eye because when people see those price increases, they just think that retailer wants to make 30 to 40 cents more, when really they're restoring [gas prices] to a level they probably should have been at all along," Imus said. "I think it's terrible for our industry. It gives us very bad PR, but for consumers it's probably a wash… nobody's being taken advantage of."

The Federal Trade Commission agrees.

The agency closely tracks gas prices and, following a flood of consumer complaints about gasoline price spikes in Midwestern states, the FTC issued a study about price cycling in 2011. Its investigation determined price cycling does not harm consumers and, to the contrary, actually results in an average gas price that is roughly one cent per gallon cheaper than in states where price cycling is uncommon.

It appears there is no collusion or price fixing – just intense competition – that drives the practice of price cycling.

"When I first started tracking this phenomenon, I thought there's no way it could legal. But then at the same time, I started noticing that it's saving me money," said DeHaan. "I can fill up when stations are losing 10 to 20 cents a gallon sometimes. If you know what to look for and when it's going to happen, you can come out ahead every time."

Who's responsible

Gas station owners and managers contacted by WTHR would not discuss price cycling on camera. But privately, they told 13 Investigates that their employees are instructed to visit nearby gas stations on a daily basis – sometimes both in the morning and again in the late afternoon – to survey competitors' gas prices. That information is then sent to corporate offices, where decisions are made about changing the gas station's prices or leaving them the same.

Most of the managers, who spoke to WTHR on the condition of anonymity because they are not authorized to speak on behalf of their retailers, admitted they do not like price cycling. So why do they do it? Fingers quickly pointed to the same place: Speedway gas stations.

Speedway and its parent company, Marathon Petroleum Corporation, operate hundreds of company-owned gas stations throughout Indiana. It dominates the convenience store scene in Indiana, and in states where Speedway controls the market, the market is dominated by price cycling.

"They are very competitive and take on the role of the price leader," DeHaan told 13 Investigates. "They bring prices down, but they are very quick to then adjust them back up. Many stations kind of follow what Speedway does." DeHaan is so convinced that Speedway is the leading player in Midwestern price cycling, that he also refers to the pricing strategy as "The Speedway Effect."

He says other gas stations have no choice but to follow.

"They all now participate in it. Because of Speedway, they all kind of follow the same game," he said.

Imus told WTHR that competition does play a significant role – often the leading role – in gas stations' decisions about pricing.

"If I am dropping my prices, everyone around me is going to have to follow. If they see a station below cost, they're going to have to sell below cost – even if they may not like that," said Imus. He did not, however, place blame solely on Speedway.

"I think it's unfair to single them out. A lot of stations are doing this," he told WTHR.

Speedway declined WTHR's request for an interview and would not answer any of 13 Investigates' questions about price cycling. The company did provide a written statement, saying there are many factors that go into the retail price of gasoline.

"The largest component is the price of crude oil, which is the primary feedstock for refiners. However, there are many others, including the cost of transporting crude oil and refined products, the cost of refining the crude oil, taxes and regulations that vary from state to state and locality to locality, and local or regional shortages or over-supplies," wrote company spokeswoman Stephanie Griffith. "The gasoline retail business is extremely competitive, with retailers constantly trying to edge out their competition. Each individual marketer will decide who they think are their competitors and will often access what their competition is doing on a daily or more frequent basis. Each marketer will decide if they want to make a change to their price based upon this competition."

Local and global events, severe weather and commodity prices can have a major impact on gas prices. Tensions in the Middle East or a fire at a Midwest oil refinery can send fuel prices skyrocketing. While the price of crude oil does play a key factor in the price of gasoline, it does not explain most of the sudden price spikes at Indiana Speedway locations. Last Tuesday, for example, when fuel prices jumped more than 35 cents at Speedway and Marathon gas stations across central Indiana, the price of crude oil actually decreased that day.

So why did gas prices jump so dramatically on May 8?

“Nowhere else in the country do you have the opportunity to fill up when the station is selling at cost”

"When [the price] gets really low and stays there for a few days, it always jumps back up," a Speedway employee told 13 Investigates. "That's one thing you can always count on. For customers who get angry, I just tell them 'You should have been here yesterday.'"

"That's why I call it a game," DeHaan said, smiling. "Are they going to beat me to the punch and raise gas prices before I can make it to the pump and fill up on their dime, or am I going to come out ahead? We now have figured out when these price hikes are going to happen and can save each time it does. Nowhere else in the country do you have the opportunity to fill up when the station is selling at cost."

How to save big

DeHaan's company relies on crowdsourced gas price updates to provide hyper-local pricing information in cities and rural communities all across the nation. Millions of people use GasBuddy's website and mobile app, and one of their most useful features is real-time alerts to warn subscribers of imminent price jumps in specific areas. Because GasBuddy users are constantly sharing price updates, the company can quickly detect large, sudden price increases.

That's exactly what happened on the day 13 Investigates visit GasBuddy offices in downtown Chicago. We found DeHaan closely watching Indianapolis-area gas prices because he had noticed the very beginning of a price spike.

“Just by filling the tank now rather than later, motorists can easily save 30 to 40 cents a gallon”

On the day we visited Patrick at his office in Chicago....he noticed the very beginning of a price spike in Indianapolis.

"All these stations, up 22 cents, 20 cents, 27 cents, 30 cents," he said, pointing to computer screens where he was monitoring pricing updates. "I think this is happening again."

Within minutes, DeHaan sent a price alert to thousands of people in central Indiana, warning them that gas prices that had been well below $2.00 for several days were about to jump to $2.35. He noticed that seven Speedway gas stations had already made that price adjustment, meaning it would be only a matter of hours before nearly every gas station in central Indiana would follow suit.

"This alert will eventually make it, hopefully, to tens of thousands of motorists in Indianapolis," DeHaan said, as he activated the alert system. (Toledo and South Bend got gas price alerts a few minutes later.) "Just by filling the tank now rather than later, motorists can easily save 30 to 40 cents a gallon."

He was right. By the time we returned from our trip to Chicago later that afternoon, gas stations that had been selling fuel for $2.04 and $2.07 had jumped to $2.49. Some gas stations did not raise their prices until later that night or the following day, giving Hoosier drivers ample notice to fill up at a significant discount.

"If you were to always fill up when you saw the alerts, I would say you could easily save $100 to $200 a year," said DeHaan. "We're beating them at their own game and allowing you to keep more of your money – that's our mission."

The service is free, helping making GasBuddy one of the most popular gas price apps in the world.

If you want to fill your tank before gas prices spike, GasBuddy is just one option to stay ahead of the game.

Meijer gas stations (located throughout the Midwest) and gogo stores gas stations (eight locations in the Fort Wayne area) offer gas price alerts for customers who sign up for them. The alerts provide a warning a few hours before pump prices are scheduled to rise.

Kentucky-based Thorntons gas stations (which now has two dozen gas stations in central and southern Indiana) has a "price guarantee" program for its Refreshing Rewards members. If there is a big jump in gas prices, program members can still fill up at the lower gas price for 24 hours after the spiked price takes effect.

Store employees told WTHR about the program, but you'll have to ask for the lower price to get it. The company's website does not actively promote the price guarantee program, and a Thorntons spokeswoman told 13 Investigates she would not send WTHR a statement about the program.

Speedway also has a gas price guarantee. Some stores will give Speedway loyalty program customers the lowest price posted since 12:00 am of the current day. So if prices skyrocket in the morning or afternoon, loyalty program members will pay the pre-spike price until 11:59pm.

If you know of other gas price alert programs or price guarantees at gas stations, please let us know at 13investigates@wthr.com.