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Archive for Sunday, May 25, 2008

What’s involved in a tank of gas?

Complex factors determine price of fuel on any given day

Oil tankers are moored near the Chevron refinery in Richmond, Calif.  Americans getting an early start on the Memorial Day weekend found that gasoline prices again sprinted to a record overnight, reaching a national average above $3.83 a gallon Thursday.

Oil tankers are moored near the Chevron refinery in Richmond, Calif. Americans getting an early start on the Memorial Day weekend found that gasoline prices again sprinted to a record overnight, reaching a national average above $3.83 a gallon Thursday.

May 25, 2008

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This is an overhead view of New Haven, Conn., harbor as seen Thursday. 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.

This is an overhead view of New Haven, Conn., harbor as seen Thursday. 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.

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? 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 this past week, setting records 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 your local gas station owner.

Not that understanding the breakdown makes it any less cringe-inducing to fill 'er up.

The process

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 until, finally, drivers pay the ultimate tab at the pump.

Oil prices and the dollar

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 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.

"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."

Supply and demand

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.

For example, oil prices rose $2.46 in one day last month amid reports a ship under contract to the Defense Department fired warning shots at two boats in the Persian Gulf that may have been Iranian.

A Navy spokesman later said the origin of the boats was unclear, but the news raised concerns that a conflict between U.S. and Iran could cut oil supplies from the region. That same day, gas prices rose another 2.1 cents to a then-record national average of $3.577 a gallon on other supply concerns.

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.

Regional variation

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.

Some of those places, like California and New York, also have higher local taxes that push the price higher.

Oil companies may not set the price of oil and gasoline, but not everyone is willing to sit back and let them claim to be innocent bystanders.

In particular, for the second time this year, Big Oil's biggest executives were on Capitol Hill in recent days getting pummeled by many in Congress for their record profits while Americans struggle with record fuel prices.

"Where is the corporate conscience?" Sen. Dick Durbin, D-Ill., asked the top executives of the five largest U.S. oil companies.

Other factors

But 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.

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.

At your pump

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.

Comments

classclown 5 years, 11 months ago

What's involved in a tank of gas?Insert credit cardInsert nozzle into gas tank openingBegin pumpingCringeExpress shock at the total priceExpress outrage at the total priceCry (optional)Drive away shocked and outraged (and crying if that option was used)Make promise to self to drive more conservatively to save gasMake promise to self to use alternative transportation (bike, bus, etc) and/or walk more often in order to not rely on gas as muchNever fulfill those promisesRepeat

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notajayhawk 5 years, 11 months ago

ASBESTOS (Anonymous) says: "I don't think the Oil Companies sell jerky. Yes, I can read and did read the article."Um, duh. I said I hoped you realized it, as in I was just trying to clarify. As for the rest of my 'tirade,' I was simply giving an example that illustrates the math involved. Sorry it was over your head. But to answer your question, the reason they continue to sell gas if they're not making money on it is because most people don't go to QuikTrip to spend $1.69 on a two-liter of pop they can get elsewhere for $1.15, or $3.50 for a bag of chips that costs $1.88 at the grocery store, unless they're also stopping for gas. Then again, maybe you do, which would explain the difficulty you're having understanding basic concepts. Ask someone who understands business, particularly marketing, what the term 'loss leader' means, since you don't seem to be able to grasp it. Incidentally, as usual the award-winning LJW shortened this AP story. Right after where the LJW stopped, the story went on:"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."http://news.yahoo.com/s/ap/20080524/ap_on_bi_ge/money_in_the_tank_6

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ASBESTOS 5 years, 11 months ago

"I hope you realize you're talking about the retailers here, not the oil companies (who own only 1 in 20 gas stations)."I don't think the Oil Companies sell jerky. Yes, I can read and did read the article. For the rest of your tirade, well, if they are using the gas to get people in the stores, they why are they complaining if they make no profit on gas? Why would they care, they make the most money according to you and the article from the rest of the stuff. My point exactly!

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notajayhawk 5 years, 11 months ago

ASBESTOS (Anonymous) says: "IF these businesses "make no money selling gasoline" then why the hell do they continue to sell it? The excuse tha they "Sell the gas" so they can make profit on Jerky, won't simply wash."I hope you realize you're talking about the retailers here, not the oil companies (who own only 1 in 20 gas stations).And if you're going to downplay the incentive to make money off of sales of other non-petroleum products, maybe you should do the math. If someone like me fills their tank when it's half empty, and the station loses 5 cents per gallon, they lose about 30 cents - which is about half of what they make if I buy a 32 oz. pop while I'm inside. Every retail establishment understands the concept of marketing through a 'loss leader'; the retail gas stations are lucky enough to have a loss leader that is very, very high in demand. Or is there some other reason you believe virtually every gas station in this country now has at least some portion of their business dedicated to these other products?*********lazz (Anonymous) says: "and no states attorneys general, or the U.S. Dept. of Justice, EVER investigate the possibilties of collusion and/or gouging?"Take out the oil companies' profits. How far down did the price of gas go? Something else you seem to have missed from the story: Gasoline end prices have gone up only 19% while the price of crude doubled. (Even taking into account just the portion of gasoline prices attributed to oil prices, the end price of a gallon of gas should have gone up 35% during that time.) As the article correctly states, oil companies neither set the price of a barrel of oil (they're consumers at that stage) nor the price at the pump - the 95% of independently owned retail stations do that. Who is it you think the justice department should be investigating for collusion?

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prospector 5 years, 11 months ago

Asbestos, you have many good points, too bad those that need to be listening are not.I have an issue with calling it a static market. It is a finite commodity. We are using oil at a rate four times faster than we are finding it. The world consumes 8 billion barrels a year and there are only 2 billion barrels of new reserves found each year.

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lazz 5 years, 11 months ago

This article describes an incredibly complex maze of factors: OPEC, the dollar's strength, investors fleeing the stock market, commodities futures, distribution ... so how is it that through this incalculably complex global machine, at the end of the line, everybody's prices are exactly the same, and fluctuate up (and, once upon a time, down) absolutely in sync, and no states attorneys general, or the U.S. Dept. of Justice, EVER investigate the possibilties of collusion and/or gouging?States attorneys general led the charge against big tobacco; perhaps they can -- and should -- do something here.AND: Why is it that with bad news, prices jump immediately, LONG before the more expensive crude reaches market, but, accordng to this article, a drop in demand wouldn't create easing of prices for a long time. Quoting the story: "Lower demand should mean lower prices - but it takes time for that to happen, given the enormous scale of refining operations that produce gasoline." That fact that it moves at lightning speed when going the other direction is just blindly accepted. It's time attorneys general stood up and did their jobs.

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ASBESTOS 5 years, 11 months ago

A very fluff and infantile artilcle from the "Associated Press" that show a lack of journalistic capability so ever present in the media. There is no research, the reporters simply parroted the "talking points" of the oil industry.IF these businesses "make no money selling gasoline" then why the hell do they continue to sell it? The excuse tha they "Sell the gas" so they can make profit on Jerky, won't simply wash.And refining, these companies make a lot in the refining, and refining controls the price. Like later this summer, the refineries are going to "switch" to making heating oils and fuels for heating. Like those of us that have worked around refineries and have a modicom of chemistry knowledge are supposed to believe that they "shut off the gas" refining, to "turn on the fuel refining". Hell they are diffferent fractionations in the oil production.What is affecting the oil prices the most are the "Speculators", everything else is pretty much static with the exception of China and India increase in oil demand.The United States can get out of this mess. Implement a sound (non-partisian) long term energy policy, that means nuke plants, and the much on the left championed wind and solar. But there is also a need to drill more of our domestic reserves like in the Gulf and in ANWR. China and other countries are already drilling in the gulf of Mexico, why the hell is the United States not? Our President goes begging the House of Saud in Saudia Arabia for more oil, when we have a lot here? New Refineries need to be built. Kansas is a great spot, right in the middle, just like a couple of Coal Power plants, and a couple of Nuke plants in Kansas, and Kansas would be the center literally of the Universe in energy.SO the Lefties have to allow drilling and developing our reserves, back off the Coal Fired power and Nuke power plant oppositions. That is simply a political position, plain as dayu, and it is not very good for our citizens or our country.ON the Right, we cannot continue to subsidize oil companies and have virtually no regulation on the "oil speculation market". Yes they are making money and record profits, but the effect is not good for our citizens and our country.SO the left and the right are both to balme with their rigid positions and "litmus tests", and the AMerican CItizens are left in the middle sucking on it.That is EXACTLY why the "BRANDS of the Democratic and Republican Parties are so damaged.We Know you have no courage, leadership or ethics, and you lie for fundraising, and are simply not concerned about the citizens. We are on to you politicians.

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prospector 5 years, 11 months ago

cool, does making money equal bad? An "individual 'stakeholder CEO", I'm not sure what that is but what do you have against "shareholder profits'"? It is what most US citizens depend on. Do you want us all to be destitute?You must be talking about the ethanol industry? Selling ethanol as smart and green while we are starving a billion people sure make me feel warm and fuzzy. Archer Daniel Midland should be eviscerated. They are slimy. ADM, they are just Moonshiners. At least the oil companies are doing something to push the envelope with technology, risk billions, and make a good return on the investment sometimes. They get whined at by a bunch of pandering, grandstanding politicians that probably know less than you about the extraction of oil from the ground. Addicts(all of us) don't need to be told by a "media control" and advertising campaign what to do. I guess you got to blame someone else. That is what addicts do. Don't let some basic economics get in the way of your rants.Learn something today athttp://www.eia.doe.gov/emeu/steo/pub/contents.htmlLots of charts and graphs explaining why we are screwed. It isn't the oil companies. If you need some help, ask.

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cool 5 years, 11 months ago

1 corporate profits#2 individual 'stakeholder CEO & shareholder profits'.#3 advertising & lobbyist efforts to maintain those profit flows.#4 media control to maintain the status quo of profit to #1 & #2 above

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le 5 years, 11 months ago

On account a he is a crook!

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le 5 years, 11 months ago

Deciet...Lies..and our money in Bush bank account!

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le 5 years, 11 months ago

Thats what is in your tank of Gas!

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le 5 years, 11 months ago

Whats in a tank of Gas...A huge rip-off thats what..don`t you find it curious that when Bush took office..Gas prices skyrocketed...and who owns a big chunk of the oil biz...Bush! He has lined his pocket and lined the pockets of his oil buddies..and to add insult 2 injury ...the oil companies announce they have made record profits ! Stand up america and unite and have your voice heard! You all know this is wrong and the Bush administration is crooked the G.O.P. is crooked!The oil companies are crooked!

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