The question and answer article on fuel prices in the business section did little to unravel the “Mysteries of the oil market” (May 15). With all due respect, Oil Price Information Service employee Tom Kloza’s answers did not tell the whole story.
The first question asked why a drop in the price of a barrel of oil hasn’t resulted in falling prices at the pump. Kloza’s answer basically compared apples to oranges. The falling cost of crude oil has absolutely nothing to do with the price consumers are currently paying at the pump.
The fact is, today’s gasoline prices are based on what the cost of crude oil was months ago. Before it can be sold as gasoline, crude oil must go through a refining process. Thus, a drop in crude oil prices today will not translate into lower prices at the pump until the new gasoline hits the market a month or two down the road.
Kloza’s answer to the third question, which asked what fuel prices will be this summer, bears this out. He indicated fuel prices will likely drop below the $2.70 per gallon average of last summer by June, but he failed to connect the dots between the anticipated drop in future gasoline prices with today’s falling crude oil cost.
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Moreover, gas stations pay for fuel at the time it is delivered, not as it is sold. This is an important distinction. It means that even if wholesale fuel prices drop five minutes after a station receives a load, the station is still stuck paying the higher price. In order to recoup its costs, the station must sell off the fuel already in its tanks before it can significantly lower its pump price.
It also bears noting that oil companies have advance knowledge of when wholesale price will change. They have been known to “top off” a station’s in-ground tanks just before the price drops — a devious practice that allows the oil company to collect at the higher wholesale price and leave the dealer to try and sell it after the price drops.
The second question asks why fuel prices differ from one area to another. Kloza’s answer touches on some truths but omits several key factors. Again, we need to compare apples to apples here.
The price of brand-name fuel (i.e. Chevron) cannot be fairly compared to generic fuel (i.e. Gas-N-Go type stations). The branded names tend to have fuel additive packages that increase the efficiency of combustion, which means better mileage per gallon. Such additive packages are expensive to manufacture and add to the price of brand-name fuel.
Stations bearing a brand name are usually required to only purchase fuel from that oil company. Conversely, generic fuel often lacks the additives and, additionally, can be purchased “off the rack” at more competitive prices based on what the market will bear.
Also, there are states, including California, that have higher emissions standards than others. To meet those standards, the crude oil goes through more extensive and expensive refining processes. The result is higher wholesale gasoline prices in those states.
Additionally, some oil companies employ a “zone pricing” strategy, whereby wholesale prices are adjusted based on demographics, driving habits, per capita income, etc. This is why you may see higher prices in a more affluent neighborhood than, say, a college neighborhood.
Moreover, and most importantly, there are oil company-owned gas stations operating in direct competition with independent dealers bearing the same brand name. The independents often own the business but lease the property from the oil companies. In other words, they pay rent (commonly in excess of $10,000 per month). The company-operated stations generally do not lease the property, or if they do, it is at a much reduced rate.
It is also very likely that the company-operated stations pay a lower wholesale price for fuel than independents. Because their overall costs are much lower, a company-operated station can charge less per gallon than an independent selling the exact same fuel and still make the same profit.
This leads us to the fourth question, which asks how the cost of a gallon of gas is determined. Kloza’s answer speaks only to the wholesale price charged by the oil companies to the gas stations. To determine the retail price we as consumers pay at the pump, overhead costs must be factored in.
As already discussed, some stations have to pay rent. Add to that electricity (in the thousands of dollars), insurance, wages and payroll taxes, repairs/maintenance, operating supplies, etc. Readers might be surprised to learn that, on average, an independent operator’s net profit is about a nickel per gallon of gas.
One more factor that most consumers aren’t even aware of is the fact that each time you swipe your credit card at the pump, the dealer pays a percentage of your total purchase to the oil company. Over the course of a month, credit card fees can average $5,000 to $10,000, which is money out the door to the station and direct profit to the oil company.
No other industry is more scrutinized than the fuel industry. Nobody faults Starbucks for charging the equivalent of $126.00 per gallon for coffee, yet gas station operators are vilified for charging what the consumer unilaterally determines is an unfair price for a gallon of fuel.
Understanding the difference between crude oil and gasoline prices, as well as the numerous factors that contribute to retail pump prices, really isn’t a mystery. It’s a matter of being informed. Veronica De Coster’s family has been in the service station industry for nearly 40 years as independent dealers.