Skip to comments.Setting Pump Prices (Good read!)
Posted on 05/25/2008 2:49:33 PM PDT by kellynla
Consider the game of chicken that plays out every day across Pennsylvania 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? Why is a gallon of gas, say, $4.11 -- not $4.10 or $4.12? Why is the price different across the street?
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 last week, setting new record highs all the while.
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 gas station owners.
Not that understanding the breakdown makes it any less cringe-inducing to fill 'er up.
Step by step
First a primer on how gas gets to your tank:
Once oil is pumped from the ground, it can be sold on the spot market, a last-minute trading arena where oil companies and distributors buy and sell to each other, or straight to refiners. After it's brewed into gasoline, the product can again be sold on the spot market, or directly to wholesalers, who in turn can supply their own stations or sell it to other retailers.
Each step of the way, buyers and sellers negotiate a price.
At the starting point of all this is the price of oil -- which, like the oil itself, is nothing if not crude.
The knee-jerk villains 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 gas.
Prices are a function of the open market, the result of futures contracts traded on the New York Mercantile Exchange 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 prices will rise or fall.
Lately, 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.
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.
"Crude is the driver," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill. "As long as it stays up there, gasoline's not going to be able to decline much at all, even if demand slips. That's just the way it is."
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," Ritterbusch said. "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.
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.
It's not only about the price of oil. 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. (Iowa's is 40.1 cents; Illinois, 57.9; and Missouri, 36.0 cents per gallon.) 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 United States, 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.
Maintaining a balance
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.
Thank goodness for beef jerky and sodas.
Most gasoline retailers long ago got past any illusion they can make money 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.
"You're always out there competing with the guy next door -- literally with the guy across the street -- and worried too about how you're going to pay for your next supply," said Rayola Dougher, a senior economic adviser at the American Petroleum Institute, the oil industry's trade association.
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 also will 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.
Of course, the plight of retailers is little consolation for drivers.
Mayra Perez said she works two jobs to help support her family, and gasoline is becoming harder to afford.
She was filling the tank of her car in Miami last week to the tune of $3.89 per gallon.
"This is horrible," she said. "On the weekend, my husband and I use only one car to save on gas.
"But then there's the cost of food, milk, eggs, the rent."
Adrian Sainz in Miami contributed to this story.
A Primer on Gasoline Prices
Energy Information Administration
At these prices it’s not even worthwhile shopping for the lowest price in town. I just fill up at the nearest station. All of their prices are obscene. Thanks RATs & RINOs
Send this to your congresscritter, to Bill O’Reilly and all the other populist demagogues out there.
I was buying my gas by setting a dollar amount a month, and filling the tank with it.
Now I set a dollar amount and I’m lucky if the tank is 3/4 full; but when the needle sits on “E,” you can bet I’ll find alternate methods of transportation!
What we need is a good, old-fashioned gas war.
Anybody know where I can find hard data on profit per gallon of gas sold vs. taxes per gallon collected?
“Anybody know where I can find hard data on profit per gallon of gas sold vs. taxes per gallon collected?”
Sure, for starters, you can check out the link I posted in my first post. That’s the Energy Information Administration, Departmen of Energy’s website. Lots of good info there. And of course gasbuddy.com has more info.
That’s an informative link, but it doesn’t seem to cover the actual profit gained by so-called “big oil” companies. I believe that actual net profit per gallon is a lot less than what the government gains in taxes and fees.
That’s much better than the Washington Post, who ran a front-page story on how evil Exxon-Mobil was even taking advantage of their own franchise owners in their evil lust for a few more pennies of profit.
The democrat party has its nose stuck so far up the anus of the Sierra Club they have to ask permission to breathe.
I believe “thackney” will be able to help you with exact figures.
it ain’t the rats nor the rinos. If you have a 401(k) mutual fund, you should check and see if Energy EFTs are any part of their portfolio. THOSE are the B-Tards that are pushing this up.
At some point, there is going to be a :long” squeeze on the futures. Once the inventory starts moving in the other direction, the speculators will start to see their profits decline. They will rush to the door, and that will start a downward cycle.
It ain’t the local gas guy and it aint the government. Its the gas futures market. Where do you think the big time speculators went when the housing market crapped out.
Capitalism at its best...and worst.
PS: Big Oil buys their oil years out to smooth out the expenses. They are making a killing now on oil they bought two years ago. But that is going to swing around pretty damned fast.
Bingo!!! I've trying to explain this to people for months.
My Republican congressman, Steve King says otherwise. He’s taken the trouble to go to ANWR. I’ll believe Steve King over Bill Nelson any day.
Can't speak for all of them, but a good bunch of them crapped out along with the housing market. Buying with high leverage doesn't work too well in a market where supply exceeds demand.
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