Posted on 05/23/2008 12:59:00 PM PDT by decimon
Consider the game of chicken that plays out every day across Pennsylvania State Highway 441. In Marietta, where the road hugs the Susquehanna River, a Rutter's Farm Store gas station stands on one side, a Sheetz gas station on the other.
Kelly Bosley, who manages Rutter's, doesn't even have to look across the highway to know when Sheetz changes its price for a gallon of gas. When Sheetz raises prices, her own pumps are busy. When Sheetz lowers prices, she has not a car in sight.
She calls Rutter's headquarters to report the competition's new price and wait for instructions.
"I call a lot of times and say, 'They went down, hurry up! Hurry up! Call me! Call me!' Or it could be where theirs goes up, and I'll say, 'Take your time! You know, I like being busy.' But I have no control over that."
You think you feel helpless at the pump?
Bosley makes a living selling gas — and even she has little control over what it costs.
So how exactly are gas prices set? What determines the hair-pulling figure you see displayed in large electronic or plastic numbers?
It all starts with oil.
The biggest factor in the skyrocketing price of gasoline is the historic ascent of crude oil, which has surged from $45 per barrel in 2004 to more than $135 this past week.
In the first quarter of this year, based on a retail price of gas that now seems like a steal — $3.11 a gallon — crude oil accounted for all but about a dollar, or 70 percent, of the cost, according to the federal government.
The rest is a complex mix of factors, from the cost of turning oil into gas to taxes to marketing costs to, sometimes, nothing more than the competitive whims of your local gas station owner.
Not that understanding the breakdown makes it any less cringe-inducing to fill 'er up.
___
The knee-jerk villains in all of this are the oil companies, fat with multibillion-dollar profits, frequent targets of populist anger. But wait: The oil companies don't set the price of oil or the cost of a gallon of gas.
Prices are a function of the open market, the result of futures contracts being traded on the New York Mercantile Exchange, or Nymex, and other exchanges around the world.
Buying the current July crude oil futures contract means you're buying oil that will be delivered by the end of July. But most investors who trade futures have no intention of ever accepting the underlying oil: Like stock investors who frequently buy and sell their holdings, they're simply betting that prices will rise or fall.
Of late, on the Nymex, oil futures have been rising.
Why? Blame the falling dollar. Oil is priced in U.S. dollars, and the weaker the dollar gets, the more attractive dollar-denominated oil contracts are to foreign investors — or any investor looking for a safe haven in the turbulent stock market.
The rush of buyers keeps pushing oil futures to a series of new records, and the rest of the energy complex, including gasoline futures, has followed. That pushes up the price of gas that goes into your tank.
There is some evidence Americans are buying less gas as the price marches higher, and common sense suggests they would cut back even more if gas rose to $4.50 or $5 a gallon.
Lower demand should mean lower prices — but it takes time for that to happen, given the enormous scale of refining operations that produce gasoline.
"Once demand begins to slow, that needs to translate into inventories, then you get some price weakening," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill. "But it takes a while."
Oil and gasoline prices often move in the same direction, but they aren't linked directly. In fact, while oil prices have more than doubled in the past year, gasoline is only up about 19 percent during the same time.
Oil prices often fluctuate with production decisions from the Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world's crude, or when conflict in the Middle East or Nigeria threatens supplies.
And the rise has only grown more dramatic. Oil sprinted higher this past week, rising more than $4 a barrel on Wednesday alone and past $135 on Thursday.
As for gasoline prices: They're closely tied to demand from U.S. drivers and how efficiently refineries are operating. Falling production or inventories often send prices skyrocketing.
Those prices can vary greatly depending on the region.
The Gulf Coast is the source of about half the gasoline produced in the United States, and areas farthest from there tend to have higher prices because of the cost of shipping gas via pipeline and tanker truck all over the country.
Add higher taxes in places like California and New York that push the price higher.
Oil companies insist their earnings, measured against revenue, are in line with other industries. On top of that, rising oil prices have sharply cut profit margins for refining, and that hits the major oil companies — which both pump oil and refine it for use as gasoline.
A giant like Exxon Mobil can handle the blow. Its refining and marketing profits for the first quarter were down 39 percent from a year ago, but Exxon still banked a nearly $11 billion profit because of the hefty prices earned on crude it pumped out of the ground.
Smaller refiners aren't so fortunate. Sunoco Inc.'s refining and supply business lost $123 million in the first quarter, hurt by lower margins. Tesoro Corp. lost $82 million for the same period.
In any case, huge profits at big oil companies like Exxon Mobil and Chevron aren't because of high prices at the pump. Their massive profits are tied to their exploration and production arms, which are benefiting from record crude prices.
Higher crude costs also have squeezed profits at the refining arms of companies like ConocoPhillips, which don't produce enough crude themselves to refine at full capacity without buying more oil from other producers.
Other costs are a factor — though they've remained relatively stable.
For example, federal and state taxes added 40 cents to a gallon of gas in the first three months of this year, roughly the same amount as they added four years ago.
California's 63.9 cents of tax is the nation's highest, Alaska's 26.4 cents the lowest. How the money is used varies from state to state, though the federal take helps to build and maintain highways and bridges.
Marketing and distribution costs — the tab for delivering gasoline from refiner to retailer — were 27 cents to start the year, only 6 cents above the cost four years ago.
The cost of refining added 27 cents to a gallon in the first quarter of this year, a nickel less than what it added in 2004, according to the Energy Information Administration.
That refining occurs at sprawling industrial complexes across the U.S., with most of the biggest along the Gulf Coast. Barrels of crude arrive each day by pipeline, ship and barge. The refineries, by heating, treating and blending the raw oil, turn out products like diesel and lubricating oil.
And, of course, gasoline.
___
What happens when that gasoline makes its way to your neighborhood gas station?
Major oil companies own fewer than 5 percent of gas stations. Most are owned by small retailers — and many of them say they're struggling these days to turn a profit on gas. That's because wholesale gasoline prices have risen sharply in recent months — again, blame it on crude — but station owners have been unable to raise pump prices fast enough to keep pace.
And you can't keep jacking up the price when drivers are buying less.
Gas station owners face a balancing act: They must try to maintain a price that allows them to afford the next shipment of gasoline but not give the competition an edge.
Stations pay tens of thousands of dollars for each gas shipment before they see a cent in the register. Eventually, many make only a few cents on a gallon of gasoline, a margin that can disappear altogether when credit card fees are added in.
In the Philadelphia suburb of Havertown, Pa., earlier in the week, Sunoco station operator Steve Kehler received a load of gasoline — 9,000 gallons — which, at a wholesale price of $3.729 a gallon, cost him 4 cents more than the previous load.
That left him in a sticky situation: Should he raise prices right away to recoup some of his higher gasoline expenses, or should he hold off for a couple of days in hopes his competitors will also have to raise their prices?
"I'm surrounded by $3.89's, and I'm already at $3.91," said Kehler, referring to his prices and those of some nearby competitors. "I'm going to play a little waiting game right now."
The $33,600 Kehler must pay for his overnight gasoline delivery won't be debited from his bank account for a few days. That gives him a little breathing room, time to hold prices steady. Hiking prices too quickly will hurt sales.
"I'll probably change it tomorrow night, at closing," Kehler said. "I'll go up 4 cents."
That will put Kehler at a gross margin of about 20 cents a gallon. After paying credit card fees, labor and rent, Kehler will be lucky to break even on his gasoline sales; many times, he loses money on gas, relying entirely upon his car repair business for income.
Most gasoline retailers long ago got past any illusion they can make money by selling gas. They rely on gas sales to drive traffic to their shops, where they hope auto repairs or food and drink sales will help them turn a profit.
Thank goodness for beef jerky and sodas.
___
AP Business Writer Adrian Sainz in Miami contributed to this story.
Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha!
The socialist coasts!
And California is dreaming up new ways to tax us because they don't get enough in taxes...
... it's the spending, stupid!
Divide $131.90 by 42
You don’t get 42 gallons of gasoline out of a 42 gallon barrel of crude. You get about 20 gallons of gasoline and the remainder is in the form of diesel, jet fuel and other products....
You're on the right track, but still too high.
Crude oil is not crude oil. It comes in countless grades and qualities which determine how much gasoline can be refined from each barrel. Some are much better than others.
A good average would be about 19 gallons out of a 42 gallon barrel.
This was an amazingly accurate article issued by the AP, though. I never would have believed it.
It even accurately stated that many refineries are losing money right now, something which the majority of Americans would automatically dispute.
Don't forget that for every $1.00 in profit the gas company makes, they pay $3 in Federal taxes and duties! That's ABOVE AND BEYOND the basic tax rate on fuel...
The Feds get a direct cut from the consumer (the direct tax per gallon) AND an indirect cut via taxation on the oil company. In actuality, the Feds make around $0.50 per gallon, and the oil companies make around $0.08 per gallon.
States and local municipalities just add a bigger take...
It's worth remembering that AP is a news service and not a news outlet. The subscribing news outlets (more like partners, I think) choose which of the many news reports to print.
Accurate point, but the author, John Porretto, is the AP Business writer.
I loved my part of the legal field, buying and selling tankers, but what a headache for the rest of the company. I loved our captains and crew most dearly. Their stories, especially the one when we picked up the refugees (which I threw a tantrum about passing by [but they were afraid of piracy]), but they were as fond of me as I them and I said if they're pirates drop them overboard, but if they're refugees bring them to safety, and we did. It was a great job all around.
This might be useful:
“WWW.ENERGY.CA.GOV / GASOLINE / WHATS IN BARREL OIL
What’s In A Barrel of Oil?
Petroleum Products Yielded from One Barrel of Crude Oil in California
Product Percent of Total
Finished Motor Gasoline 51.4%
Distillate Fuel Oil 15.3%
Jet Fuel 12.3%
Still Gas 5.4%
Marketable Coke 5.0%
Residual Fuel Oil 3.3%
Liquefied Refinery Gas 2.8%
Asphalt and Road Oil 1.7%
Other Refined Products 1.5%
Lubricants 0.9% “
Total volume of products is close to 50 gallons due to addition of refining products and ethanol.
If you mean that, then you might want to consider reading the essay before you comment further.
Exxon doesn't pay $131.90 for the oil it produces.
No. They don't. But they could sell that oil they produce on the spot market for $131.90. So, what would you have them do? Sell it to us for less than others would pay?
Moreover, Big Oil produces only 25% of the crude it refines. Much of the rest is bought on long-term contracts -- from suppliers like OPEC.
What must they charge in order to budget replacement of the oil they consume?
I believe in the free market.
I don't have to misrepresent profits/costs in the oil industry to back up my beliefs.
Rush posted a link about what’s made from a barrel of oil:
http://www.energy.ca.gov/gasoline/whats_in_barrel_oil.html
I follow your premise but your calculations are highly flawed but easily corrected. A barrel of crude is 42 gallons and due to chemicals added during the refining process yields a little over 44 gallons of product. However, only 19.5 gallons of that 44 gallons of product is gasoline.
The truth is it is a complicated market and industry, much more than the average person even begins to comprehend.
The number of oil companies who both drill, refine, and market the product are very few. There are literally thousands who drill, a few dozen who refine, and hundreds who market retail gasoline in the US.
Each of those segments compete against each other, which is a good thing. It keeps all of them honest.
Today, the drilling and producing side is making all the profit. The refining and marketing arms are maybe breaking even or losing money in most cases.
In different business cycles the reverse is often true.
It all depends on what you want to call an “oil company.” Is it the Shell station down the corner? Is it the Valero refinery? Is it Bubba Joe and Mary who operate a stripper well and request a truck to pick up the oil every three weeks?
Each of them have different profit or loss margins depending on which they are.
There is no misrepresentation. It’s all out there for everyone to see. Those who do not want to examine the facts and prefer to believe in an evil plot may do so, but that is an alternative reality.
The misrepresentation is to only show cost/profit/loss from the refiner's standpoint.
That's what I was pointing out.
Refiners are not doing well at all.
I don’t think they’re making eight cents a gallon profit at the refining level today.
In fact, unless they’re incredibly efficient, they’re losing money with each gallon they send to the gas station.
If you’re only on the E&P side, upstream, you’re probably doing pretty well on that segment. Every new well you drill is a gamble, though, and it’s more expensive than ever to drill a new well. If you strike out and drill a dry hole, that could be millions of dollars for nothing.
It happens all the time.
So, is the oil industry raking in massive profits? It kinda depends who you are and what your place is in the overall scheme of things.
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