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.
Beyond oil
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.
This is one of the most appalling stupid statements I've ever read. What does Mr. Ritterbusch think DRIVES the price of crude, if not for the components it's made into? If the demand for gasoline suddenly dropped fifty percent overnight, what would that do to the price of crude oil (absent any sudden change in the demand for other petroleum products)? Geez this guy's a moron.
I think what Ritterbusch was saying is that a drop in demand is not going to affect the price of crude oil that much...the muzzies will just back off on the supply to keep the price high...we just need to start drilling more here in America so we aren't importing as much as we are from OPEC...just think, every time we fill up, we enrich our enemies...shaking my head and rolling my eyes in disbelief!
Excellent article!
You should post a thread for that piece if you haven’t already!
((3.3949 x 42) - 131.79 - 3.50) / 42 , where 3.3949 is the wholesale July futures price basis NY Harbor, 131.79 is the wholesale crude price, basis Cushing OK, and 3.50/bbl is the estimated cost of throughput, ex transportation inbound.
The Federal Motor Gasoline Excise Tax is 18.4 cents/gallon. The states respectively put on an excise tax ranging from 9 cents to 44 cents/gallon. Numerous counties and cities slap yet another tax on motor gasoline.
If your question is: ''Who's the profiteer (I prefer 'thief', but that's another story)?'', the answer is very, very clear. Goobermint.
EXACTLY! Just like it takes time for prices to rise ... "it takes a while". /sarc
Don't forget OPEC!
Actually, it does. Gasoline prices don't respond immediatly to higher oil prices, either. Crude has been going up a lot faster than gasoline.
Oh, I already know that. But I've been looking for hard numbers that support that fact (which you are providing). It just seems odd that the government officials are speaking so strongly against earned profit in the oil industry while simultaneously attempting to push an unearned profit (taxes) on the very same product.
Indeed, that goes without saying. But remember that in a "seller's market", the price rises and the seller benifits. In a "buyer's market", the price tends to fall and the buyer benefits. Right now, given the supply/demand situation, it's clearly a seller's market. Our government, through over-regulation and restriction, has helped make it that way.
bump
Or, perhaps more precisely, that's what we LET them do, instead of, say, shooting a dozen Regresscritters at random every year.
Or some other policy at least as Draconian.
Not to mention, of course, that we **COULD** have started this process in -- take your pick -- the 1970s or the 1990s.
Until the Regress gets its thumb out of its arse, which will not occur by itself, the US is screwed in terms of energy supply. Some president with balls needs to declare energy production, via an Executive Order, essential to national security...which of course it is (can I get a ''DUH!''?)
Until that time, hope you fancy MUCH higher energy prices...(shrug)...
He's also a good chap, has all the statistics you could EVER want oozing out of his fingertips, and is entirely approachable.
FReegards to you!
Do I have that right, or are there potential domestic reserves big enough to make a significant difference in the global price?
This will rock your world. Listen to all 75 minutes. Our nation’s energy independence was sold out in the early 1970s to the world bankers. The media is keeping us in a matrix-like existence by not revealing the real story for $4 gas. The war and free-spending politicos have emptied the U.S. treasury so they had to boost the gas price so the Saudi’s could buy off our enlarged debt by essentially forcing us to pay higher taxes at the pump.
Lindsey Williams seems fairly credible and the historical events tie together, plus the oil exec collaboration. Has anybody heard this from other sources? Are other OPEC nations also required to buy our debt or only Saudi?
The Energy Non-Crisis
http://video.google.com/videoplay?docid=3340274697167011147
“Lindsey Williams, who has been an ordained Baptist minister for 28 years, went to Alaska in 1971 as a missionary. The Transalaska oil pipeline began its construction phase in 1974, and because of Mr. Williams’ love for his country and concern for the spiritual welfare of the “pipeliners,” he volunteered to serve as Chaplain on the pipeline, with the subsequent full support of the Alyeska Pipeline Company. Because of the executive status accorded to him as Chaplain, he was given access to information documented in his eye opening book, The Energy Non-Crisis.
After numerous public speaking engagements in the western states, certain government officials and concerned individuals urged Mr. Williams to put into print what he saw and heard, stating that they felt this information was vital to national security. Mr. Williams firmly believes that whoever controls energy controls the economy. Thus, The Energy Non-Crisis.”
Discussed on FR recently.
http://www.freerepublic.com/focus/f-news/2017546/posts
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