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Archive for Saturday, January 20, 2007

No big windfall at pump

Consumer cost could fall further, but crude’s only half the story

January 20, 2007

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— The headlines say oil prices have fallen 15 percent this year. Gas station receipts tell a different story - the cost of filling 'er up has slipped from about $35 to $33. Big deal.

The cost will probably drop further, but drivers shouldn't hope for a big windfall at the pump: there's a lot more that goes into gasoline prices than the current cost of crude oil.

Besides taxes and the costs of refining, distributing and marketing, there are factors such as local competition among gas stations. Just as with other forms of retail, consumers see savings when one retailer lowers its price, and the others scramble to match it.

"If gasoline costs me a dollar a gallon, and my competition down the street is selling it for 89 cents, my customer doesn't care what I paid for it," said Richard Oneslager, president of Balmar Petroleum, which operates 14 gas stations in Colorado.

By the barrel

Crude oil prices have fallen from about $61 to $51 a barrel this year on the New York Mercantile Exchange, but the price of gasoline on the side of the road has declined more slowly. The average price for a gallon of regular is down about 13 cents from $2.33 on Jan. 1 to $2.20 on Friday, a day after crude briefly fell below $50.

A typical car holds 12 to 15 gallons, so if it's filled four times in a month, that's savings of less than $8 in a month - not even enough for that daily cup of coffee.

On Friday in Lawrence, the price per gallon was as low as $1.89 at several locations.

Market decisions

Average pump prices across the country haven't plunged to $2 a gallon yet, which is where they were back in early 2005, when crude oil prices were also around $50 a barrel.

The big difference was that, unlike now, crude oil wasn't coming off a record high of $78 a barrel just six months earlier.

Essentially, the recent price drop hasn't completely sunk in on the wholesale level, so gasoline retailers are still paying a lot for their product and won't lower prices until competition forces them to do so.

The Energy Department says the price of crude oil accounts for about half the retail price of gasoline. That means if crude oil is down 15 percent, pump prices should be down almost 8 percent.

But the time it takes for a drop in wholesale prices to fully affect retail prices is around 12 weeks, though most of the drop happens within the first two weeks.

"Retailers aren't making their price decisions on the price of crude oil," said John Eichberger, vice president of government relations at the National Association of Convenience Stores. Instead, they focus on how much they paid for their current load of gasoline, and how much their supplier is telling them their next load will cost.

"We don't care about anything except what that tank the truck just brought in cost," Oneslager said.

A sharp rise in crude oil is another story. After crude spiked to record highs the past two summers, it didn't take much time for gasoline prices to follow suit. That's mainly because retailers got nervous that their next shipment of gasoline would cost a bundle, and also because they knew that summer demand is high and drivers could at least for a while pay inflated prices, albeit reluctantly.

Contrary to what many drivers think, the huge "ExxonMobil" or "Chevron" signs above your local gas stations don't necessarily mean they're run by big oil companies - a lot of them are franchised. Jeff Sundstrom of AAA estimates that over 80 percent of the nation's gas stations are run by individuals or small to medium-sized businesses.

The average gasoline retailers have to charge 13 cents per gallon more than they paid to break even, Eichberger said, and mark it up even more to make a profit.

Low profits

The Oil Price Information Service shows that in 2006, the average gross margin for retailers was 13.76 cents a gallon - meaning profit was less than a cent per gallon. Because of credit card transaction fees, the credit card industry profited more from gasoline sales last year than gas stations did, Eichberger said. So station owners are loath to bring prices down too far too fast, especially if they're recovering from profits that were squeezed last year.

Price wars hit in November and December, Oneslager said, even though wholesale prices were fairly steady and crude oil was down from its summer highs.

Crude oil prices are about $10 lower than where they were a month ago, and many market analysts are saying they could tumble even lower. The reasons include the Northeast United States' warm winter, which caused a glut in heating fuels, and traders following a wave of big funds in making bets in the market that prices will fall. Also, demand may not be as high as some had thought: the American Petroleum Institute said Friday that in 2006, U.S. demand for petroleum fell to below 2004 levels.

Comments

Sigmund 7 years, 8 months ago

The Oil Price Information Service shows that in 2006, the average gross margin for retailers was 13.76 cents a gallon - meaning profit was less than a cent per gallon. Because of credit card transaction fees, the credit card industry profited more from gasoline sales last year than gas stations did, Eichberger said.

What Eichberger failed to mention is that at 50 cents a gallon in taxes, governments make more per gallon than the retailer and the credit card companies combined. Yet another reason why despite the rhetoric Governments will not do much to discourage gasoline usage. It simply isn't in the politicians greedy self interest to do so.

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