Who's Kidding Whom on Gas Prices?

Have you noticed the price of regular unleaded gasoline at the pump in your area lately? In Seattle, the price went from $1.857 on January 2, 2009 to $2.066 per gallon on January 16, 2009, per the gasbuddy.com web site.

Nationwide gasoline prices have continued to increase in the last two weeks, whereas the price of crude oil actually went back under $40 a barrel. Is the wool being pulled over eyes by the oil companies or are there some other explanations for the cost discrepancies?

The view of the common man is that when crude oil price go down, gasoline price go down. That has not been the case as of late. The reasons gasoline prices have been rising are as a murky as a barrel of oil, but here are couple of them.

The main reason is that it was caused mainly by the oil refineries, that are either down or having glitches, reducing overall fuel production. Another explanation is that the February contract for crude oil, which closed Friday at $36.51 a barrel, expires on Tuesday. The contract for March is already significantly higher, settling at $42.57 on Friday with June even higher at $51.35 a barrel.

The graph below details the estimated gross margins for both refiners and distributors. This an example of the price for regular unleaded gasoline in California taken from the Estimated 2009 Gasoline Price Breakdown & Margins Details Report issued by the California Energy Commission web site showing us the different profits and costs involved in the pricing gasoline.

It shows that the price of gasoline is being controlled by the market. In the last two weeks, the independent unbranded pump prices have remained the same with the branded major oil companies increasing theirs.

What a difference a week makes for the unbranded independent stations in California. They went from a 34 cents negative margin to being "only" a nickel a gallon in the red per this graph. It also belies the fact that the gas station dealers are the ones raking in the extra profits in the current up market for gasoline.

How does my local gas station set their pump prices? Gas station owners will try to maintain a price that allows them to afford the next shipment of gasoline, but they are also trying not to give the competition an edge pricewise.

click to enlarge

With what is happening with gas prices you may not feel like kidding around when pulling up to the pump next time you fill up. But, the dealer is certainly not the one to blame for rising gasoline prices.

So, who's kidding whom on setting gasoline prices? We live in a new world in the petroleum industry this year with many changes in store for us, including higher gas prices. The major oil companies control the gasoline prices by pricing it in different areas of the country according to what the market will bear. So, if you want cheap gas, move to Billings, Montana, where gasoline is still being sold for $1.339 per gallon.

Disclosure: I hold no positions in any of the commodities or equities mentioned in the above article.

Comments

[Bob van der...:]

"Curious" - I obtained the per gallon breakdown of cost and profit margins for regular unleaded gasoline in California at the following California Energey Commission web site:

energyalmanac.ca.gov/g...

I used them only as an example since the CEC is they only governmental agency in the U.S. sanctioned by regulation to obtain the dealer tank wagon and rack prices direct from California refiners and major oil companies. The major oil companies obtain information on each other's competitive pricing from The Lundberg Survey, who gathers the pricing data and other statistics from dealers and other sources willing to submit that information to them. Lundberg the sells this information back to the major oil companies who in turn price their gasoline according to what to market will bear. They continuously monitor their market share and competitive stance in the market very carefully.

I am of the same opinion as yours that fuel drove crude oil prices down assisted by demand destruction in the last four months of 2008.

Jan 19 09:30 PM

[Currious WV:]

Yeah they found another way since they know that we know how the speculation from all these banks did their little profit margins as reported last week on 60 Minutes. They will do anything to keep the price up. As stated before our new fearless leader which goes into office at the White House tomorrow should put a price cap on it before it gets out of control again and before it brings the entire economy down to it's knees. Obama please do something before something drasticly happens.

So Mr van der Valk who is really kidding who. Please tell me the truth.

Jan 19 10:48 PM

[Jet Pilot:]

Gas in Redding, California took a jump from $1.50/gallon and $36 barrel on December 20th, and has done nothing but increase to $2.05/ gallon and climbing. All this with STILL $36.00/barrel oil. What a scam. I have had three phone conversations with local distributors and they all say the oil companies are gouging consumers. The is NO justification for the rise in price per gallon in Northern, California. In fact the NYMEX price bottomed in December at $35.54 a barrel and this price was never reflected at the pump. These greedy oil companies are acting with monopolistic behavoir and they need to be fined for gouging the California comsumer. Their greed is really showing, and I hope oil falls to $15.00/barrel so they cannot hide their greed anymore.

Jan 20 05:38 AM

[Bob van der...:]

Oil companies did profit from the "Crudomania" that existed in crude oil prices. The reasons for the current price run up in pump prices, in face of declining crude oil prices, were stated in my current article. Another factor at work is that the refineries typically start switching over to making summer gasoline by the middle of February each year. Some of the major oil companies including BP and Tesoro have already taken down some units at their Carson, CA and Anacortes, WA refineries for the Spring turn-a-round.. This was mainly due to lower demand for their finished products. In addition the Big West refinery, owned by bankrupt Flying J, is now dead in the water without having a crude stream to run the plant. This all adds up to lower supplies of gasoline and diesel at least on the West Coast. The sorting out process in the petroleum industry will continue with more mergers in the works to consolidate them. The last thing we need is for government intervention by either instituting price controls or draconian tax measures.

Jan 20 07:16 AM

[huangjin:]

Oil companies didn't segregate the U.S. market, the EPA did.

Jan 20 08:51 AM

[firstinpro:]

Great insight! WIthin the next 24 hours we plan to link to your column from the OilCompanyBastards.com web site. People need to know this!

Jan 20 08:58 AM

[WayneS:]

Gasoline prices need to stay above $3 per gallon.
Last year, $4 gasoline saved 1700 lives and
billions in health care. It also reduced our preference
in wasting gasoline to feed our egos. Who knows,
maybe it reduced global warming. That's right, it's
not global warming anymore, it's climate change.

Jan 20 10:40 AM

[Jet Pilot:]

Bob:
Thank you for the reply, you are awesome and you are doing a good job.

Im the reply you said, "The last thing we need is for government intervention by either instituting price controls or draconian tax measures."

This is exactly what is needed. If price controls were in effect two years ago, the economy would not be in chaos now. If the government said gas will cost $2.00/ gallon, all the speculation would not have happened. I just want to pay the same price every time I fill my car. I do not want to pay ten cents more every week. The government instituted price controls in effect on the banking industry TARP program. Why not rein in the greed by big oil also. As far as Flying J, that is such a small portion of the over market, it DOES NOT jusify raising prices by .50 cents a gallon in two weeks. What needs to happen is this. NO oil specualtion at all, unless you plan on taking delivery of the fuel. (Airlines, Trucking, Suppliers) Fuel is to important of a compenent in the economy to include in speculation. If you want to sit at your computer and daytrade Cisco Shares, go ahead. But oil??? The entities that ran fuel up to $150.00 / barrel should be in jail. I lost a job over this. Jet fuel topped $6.00/gallon in July. Outrageous. The government, Agencies like SEC, Commodity Trading should have control over "who" trades these contracts to prevent Cal-Pers (my tax dollars), JPM, Goldman Sachs, Wells, Etc from repeating the same run-up in Oil Prices. My Bank and insurance company have NO business trading oil. It is outrageous.

Jan 20 04:17 PM

[swissone:]

Let the price of gas rise.

Psychologically, the best LONG TERM thing for this country would be for either gas prices to rise again, or for taxes on gas to be drastically increased, and prod this country to continue last year's progress in exploring alternative energy sources for vehicles and the grid. We are woefully behind the global curve on this.

Jan 20 04:37 PM

[Bryan Kautzman:]

I love it when people attack the parts of the industry that have the smallest profit margins and blame them for the high prices we pay at the pump. Of course, I'm talking about the refiners and the retailers.

Jan 20 04:55 PM

[Jet Pilot:]

Swissone:

What???? The last thing we need is more taxation. I am getting taxed way to much now. Let me keep my hard earned money. Gasoline is way over taxed now and the money is NOT used where it is supposed to-THE ROADWAYS. Gas should be $2.00 a gallons TOPS. When gas rose up to $4.50 / gallon it sent the economy into chaos. Companies are going bankrupt, layoffs, etc. OUTRAGEOUS. We have an unlimited oil supply on the earth. The earth is making oil as I type this. The Oil industry wants everyone to believe, that oil is of limited supply so they can gouge consumers. IT IS A BIG LIE. Oil is like diamonds. Did you know there are enough diamonds already mined to give everyone on earth handfuls of jewels? They are just shiny rocks. Worthless. The supply, like oil is held back, so we pay more. Big oil is ripping off the world and it must stop.


On Jan 20 04:37 PM swissone wrote:

> Let the price of gas rise.
>
> Psychologically, the best LONG TERM thing for this country would
> be for either gas prices to rise again, or for taxes on gas to be
> drastically increased, and prod this country to continue last year's
> progress in exploring alternative energy sources for vehicles and
> the grid. We are woefully behind the global curve on this.
>

Jan 20 11:24 PM

[a. palmer jr.:]

I'm not in favor of higher gas prices. Some people who don't earn diddly on their jobs need to drive to work in rural and suburban areas. 4 dollar a gallon gasoline means some of us can't pay our bills. What I am in favor of is all-electric cars, and if we can get the auto industry to stop dragging their feet, saying electrics won't be ready until 2011,2012, etc we won't have to screw with the oil companies and their scams any more!!

Jan 21 12:26 AM

[Rightisright:]

A scam? Clearly we can all agree that oil prices are not controlled by anyone, except possibly Saudi Arabia which produces about 10% of the worlds oil. So a scam (market collusion) would have to come from the refiners, distributors, or gas station owners who buy the oil, refine it and sell it to the end user. Refining capacity in the US is diversified among 4-5 major oil companies and 5-6 independent refiners, and from time to time we import refined products from foreign refineries. Just check the profits for the independent refiners this year. Lots of red ink. If there's a scam, then the independent refiners forgot to participate. So now we're down to the retail station owners, which number in the hundreds, if not thousands. How can they collude when the consumer will drive 5 miles to save 2 cents/gallon? Sure, every participant in the supply chain will try to get maximum price, and occasionally, in specific cities or regions, there may be a price jump due to market dislocations (refinery maintenance, pipeline outages, hurricanes, etc.). But that's a good thing. Price jumps encourage the competition to increase supply quickly. That's why price-gouging laws are anti-consumer. They actually reduce supply and cause rationing to occur after hurricanes. High prices would pay for truckers to drive 300 miles and pick up a load of fuel and get it to the area quickly. Gouging is only anti-consumer when 2 or fewer companies control the market and agree to sustain the high price. This almost never happens if there are more than 2 companies involved in a market. One company will always break the "collusion" and lower price to gain share.


On Jan 20 05:38 AM Jet Pilot wrote:

> Gas in Redding, California took a jump from $1.50/gallon and $36
> barrel on December 20th, and has done nothing but increase to $2.05/
> gallon and climbing. All this with STILL $36.00/barrel oil. What
> a scam. I have had three phone conversations with local distributors
> and they all say the oil companies are gouging consumers. The is
> NO justification for the rise in price per gallon in Northern, California.
> In fact the NYMEX price bottomed in December at $35.54 a barrel and
> this price was never reflected at the pump. These greedy oil companies
> are acting with monopolistic behavoir and they need to be fined for
> gouging the California comsumer. Their greed is really showing, and
> I hope oil falls to $15.00/barrel so they cannot hide their greed
> anymore.

Jan 21 12:35 AM

[Rightisright:]

The justification for the rise in price is that you are free to form a company to refine gas and distribute it to stations in your area. You'll make a killing, according to you. Ask your distributor why he doesn't import product from other refiners/regions where its cheaper. Because its not cheaper by the time he pays to have it transported to his region. And if the refiners are colluding now so successfully, why don't they always collude?


On Jan 21 12:35 AM User 341244 wrote:

> A scam? Clearly we can all agree that oil prices are not controlled
> by anyone, except possibly Saudi Arabia which produces about 10%
> of the worlds oil. So a scam (market collusion) would have to come
> from the refiners, distributors, or gas station owners who buy the
> oil, refine it and sell it to the end user. Refining capacity in
> the US is diversified among 4-5 major oil companies and 5-6 independent
> refiners, and from time to time we import refined products from foreign
> refineries. Just check the profits for the independent refiners
> this year. Lots of red ink. If there's a scam, then the independent
> refiners forgot to participate. So now we're down to the retail
> station owners, which number in the hundreds, if not thousands.
> How can they collude when the consumer will drive 5 miles to save
> 2 cents/gallon? Sure, every participant in the supply chain will
> try to get maximum price, and occasionally, in specific cities or
> regions, there may be a price jump due to market dislocations (refinery
> maintenance, pipeline outages, hurricanes, etc.). But that's a good
> thing. Price jumps encourage the competition to increase supply
> quickly. That's why price-gouging laws are anti-consumer. They
> actually reduce supply and cause rationing to occur after hurricanes.
> High prices would pay for truckers to drive 300 miles and pick up
> a load of fuel and get it to the area quickly. Gouging is only anti-consumer
> when 2 or fewer companies control the market and agree to sustain
> the high price. This almost never happens if there are more than
> 2 companies involved in a market. One company will always break
> the "collusion" and lower price to gain share.

Jan 21 12:53 AM

[Rightisright:]

Higher gas taxes (say, $2/gall would be a good way of raising revenue from illegal immigrants, which would pay for some of the services that are necessary for them (healthcare, education, etc.) as well as reduce the incentives for them to enter the country illegally (most travel by car). The regressive nature of a gas tax raise for lower and middle income americans, could be offset by an income tax cut for those tax brackets. BTW, I'm in favor of much higher legal immigration. Let em in, just make em earn their citizenship.


On Jan 20 11:24 PM Jet Pilot wrote:

> Swissone:
>
> What???? The last thing we need is more taxation. I am getting taxed
> way to much now. Let me keep my hard earned money. Gasoline is way
> over taxed now and the money is NOT used where it is supposed to-THE
> ROADWAYS. Gas should be $2.00 a gallons TOPS. When gas rose up to
> $4.50 / gallon it sent the economy into chaos. Companies are going
> bankrupt, layoffs, etc. OUTRAGEOUS. We have an unlimited oil supply
> on the earth. The earth is making oil as I type this. The Oil industry
> wants everyone to believe, that oil is of limited supply so they
> can gouge consumers. IT IS A BIG LIE. Oil is like diamonds. Did you
> know there are enough diamonds already mined to give everyone on
> earth handfuls of jewels? They are just shiny rocks. Worthless. The
> supply, like oil is held back, so we pay more. Big oil is ripping
> off the world and it must stop.
>
>
> On Jan 20 04:37 PM swissone wrote:

Jan 21 01:04 AM

[Rightisright:]

the oil the earth is making right now will be ready to burn in about one hundred million years. Peak oil is about the rate of discovery and production of "ripe" oil, which is all that matters. From 2005-2007, the global economy grew at record rates and oil prices rose to record prices, yet supply was flat at 85 million barrels per day. Why didn't supply go up as prices tripled? Because we've reached the peak. Saudi Arabia produced all they could for about the last 12 months of the boom. Supply will be flat at about 85mmbpd for the next few years, then slowly decline for a few years, then the decline will steepen. We will need to transition to nat gas and coal and nuclear (and conservation - use less) now, then 20-30 years from now we will have to further transition to coal and solar and nuclear, then 50-100 years from now, we'll be out of coal and uranium and will have to get by on solar and biofuels. That will be very difficult unless fusion is solved by then.


On Jan 21 01:04 AM Rightisright wrote:

> Higher gas taxes (say, $2/gall would be a good way of raising revenue
> from illegal immigrants, which would pay for some of the services
> that are necessary for them (healthcare, education, etc.) as well
> as reduce the incentives for them to enter the country illegally
> (most travel by car). The regressive nature of a gas tax raise for
> lower and middle income americans, could be offset by an income tax
> cut for those tax brackets. BTW, I'm in favor of much higher legal
> immigration. Let em in, just make em earn their citizenship. <br/>

Jan 21 01:21 AM

[Endeavor:]

The US government has a demonstrable record of proclaiming (effectively) certain elements our economy as too basic a need to run unabated. They did this with telecommunications years ago with the Universal Service Fee, they've done it in the financial industry (and will apparently have to do it again) and with other industries.

And yet here we sit buying one of the true critical commodities sold in an industry practicing implicit collusion.
-Near zero room for innovation...
-That we need to stop using as soon as possible environmentally.
-That is experiencing hands-off treatment due to the fact
that the commodity is a tax spiggot.

And the Government wont intervene??

But they'll go in a bust up a Long Distance monopoly to save everyone $10/month only to be replaced by 35% taxes on your phone bill?????

They seem very specific and eager to get involved in the sale of alcohol.

The seem very very eager to stay involved in any transactions involving staying abreast of my banking account numbers and life status of family members; all key checkpoints in levying taxes.

But its like the old west when I go to put the life blood in my car that equates to me being able to earn a living?

Theres no bigger capitalist on the planet than me, but either put a lid on margins on gas at the pump (with 3-5 years notice for stockholders), or quit suppressing competition and make it easy to open a gas station (which is impossible due to regulations designing to protect the industry).

E

Jan 21 01:25 AM

[Jet Pilot:]

Endeavor:

You are about the only one who gets it! The government allowed mergers in the oil industry, to eliminate competion. There are only a few refiners nad oil comapnies now, and every gas station where I live in Redding, California all sell gas within .05 cents of each other. SOMEONE IS CONTROLLING AND MANIPULATING THE PRICES,otherwise Icould by gas for .50 cents a gallon. It is not the stations, it is the refiners. They are buying cheap oil right now and gouging cunsumers by selling it to the stations for above market prices. Wholesale Gasoline is (RBOB) $1.16/gallon. Why does a gallon cost $2.05 here in Redding today. There is no lag as we keep hearing, these stations immediately raise prices when wholesale gas rises, yet they are very slow to lower the price when wholesale gas falls. I am tired of these greedy oil refiners, gouging consumers.

Jan 21 03:53 AM

[WayneS:]

Gas stations have never made money selling gasoline.
Gasoline only brings people into the station where they can get you to spend your money on profitable goods.
First, it was car repair garages.
Then, it was cigarettes and beer.
Now, it is to get you into their grocery or discount store.

At the mergers of the "big" oil companies, the government forced
the merging companies to sell part of their refineries.
Now Valero is the #1 refining company in the US and they were trying to sell several last year. XOM is spending a billion dollars on refinery upgrades this year for diesel alone.

Over half of the price of a gallon of gasoline is taxes. It is taxed at every step throughout its production and at the pump. There is a very narrow profit margin. XOM sold all of their gas stations. This surprises me. They were just starting to make a profit in retail with their introducton of Tiger-Brand coffee.

Jan 21 12:54 PM

[Bob van der...:]

The price charged for gas in each part of the country is tied to the supplies available from the refineries in that area. Some areas are supplied by pipeline and identify with pricing from the origination point from which the fuel is shipped.

Las Vegas is a good example of those pricing dynamics at work today. They receive some of their gasoline via the rubber pipeline (tanker trucks) from Salt Lake City where rack prices are about 25 cents per gallon lower than what they are in Los Angeles right now. The Los Angeles refineries supply the majority of the gambling mecca's gas by pipeline. The LA unbranded independent rack price currently is about $1.50 per gallon for regular unleaded gas (before applicable taxes). The average pump price per gasbuddy.com for regular unleaded gas in LV is about 10 cents lower than the LA price, which is at $2.079 per gallon today. Howver, at that price dealers in LA and Vegas are still only making about 8 cents per gallon.

The branded major oil company stations receiving gasoline from those same racks are charged a Dealer Tank Wagon (DTW) price by their suppliers. But those prices do not necessarily follow the unbranded independent prices. In fact they are inverted today with the major oil dealers having an about 4 cents per gallon advantage. That number is usually about the same amount the other way around.

I have already outlined the method with which the major oil companies control their DTW prices in one of my earlier comments.

Hope this helps explain the different prices charged at your favorite gas station in the country today. Thanks for all your constructive comments on my article. You can find my previous articles on my personal web page at 4vqp.com

Jan 21 02:26 PM