Ronna Alexander - February 14, 2008
Montana Petroleum Marketers and Convenience Store Associati
Gas Pricing
Subject: Gas Pricing
First, this industry deals with many controversial issues but none more so than that of gas pricing. While the consumer today has a better understanding of the process in general, high fuel prices still cause hysteria, frustration and despair. Most consumers falsely believe that retailers make 10 to 20 times in net profit than they really do. They also think that major oil companies operate more than 75% of the convenience stores in the country when in fact it’s less than 3% nationwide.
The “why” of gas pricing – there are many global factors affecting the price to the end user. Refiners in the US are capable of producing 17 million barrels of gasoline per day – while the demand is around 22 million barrels pe rday. To make up the difference we bring fuel in from foreign refiners which means we are affected by import prices.
Crude oil (which is 56% of cost in a gallon of gas) is also at its’ highest average price due to huge demands from countries like China and India.
Another factor that most people are not aware of or haven’t thought about is the effect the futures trading market has on oil prices. Speculation in the marketplace has caused much volatility in prices by interests that never take possession of the product itself. There is currently action in Congress to provide for more transparency in oil trading – we believe that this oversight has the potential to lower the price per gallon up to $1.
The “how” of gas pricing – At their core retail fuel prices are based on product replacement costs. In an ascending market (when wholesale prices are increasing) retailers must set their prices at a level that will allow them to generate sufficient cash to replace the fuel. In a descending market the same holds true. As fuel prices increase at the wholesale level, retail prices tend to follow but there’s generally a lag time of a few days. Higher wholesale prices constricts the retailers profit margin – most often, the retailer makes less money when prices are high.
Montana has one pipeline that serves the state – and can be considered at the “end” of the fuel supply chain. While this region is not affected as soon with higher prices as other regions – the same holds true when prices start to decrease.
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