Happy days for gasoline retailers and consumers
By Myra P. Saefong, MarketWatch
Last update: 7:31 a.m. EDT Oct. 31, 2008
SAN FRANCISCO (MarketWatch) -- Consumers tend to notice that gasoline prices drop much more slowly than they rise, but that's not necessarily price gouging at play -- at least not on the retail end.
And this time around, prices have actually managed to drop faster than they climbed.
Prices for the fuel at the pump have dropped every day for the past six weeks, according to data from the Oil Price Information Service. They stood at $2.547 a gallon Thursday, down a sizable 38% from the record high of $4.11 in July.
It took retail gasoline prices about four months to make the $1 climb from $3 to $4 in February to June of this year. But it took only seven weeks to drop back down from $4 to $3 in early June to late July.
Then again, while gasoline prices dropped from their record level in July, crude has also fallen about 55% from its record price that month of more than $147 per barrel.
So while the market sees an unusually quick decline in retail gas prices, consumers cannot ignore the fact that the change in prices is not proportional to the drop in oil.
"Gasoline stations are clearly not the villains," he said.
A basic calculation for crude to retail valuation is that 42 gallons in a barrel of crude would translate into about 2.5 cents per gallon gasoline for every dollar in crude, said John Eichberger, a vice president of government relations for the National Association of Convenience Stores.
"This is not a very accurate measure, however, because it is not a direct relationship -- it does not account for other products derived from a barrel of oil, nor for operating costs and profits," he said.
Business wasn't so great
What consumers spend on fuel isn't necessarily what gasoline retailers get.
Williams said the cost of gasoline can be broken down into four distinct components: cost of crude oil, refining, taxes and distribution.
To determine the price at the pump, "all we need to do is to add up these four components," he said. But "you only need to attempt to do this calculation once to realize that there are other factors which influence the cost of gas."
Many consumers believe that major integrated oil companies own retail locations, said Eichberger. "About 55% are branded with contracts signed to sell fuel supplied by a refining company under that refiner's brand," he said. "The rest are privately branded and they often buy directly off the spot market."
And as market traders may know, spot prices can be quite volatile.
"Independents buy their gas from distributors that price it to the current spot market, whereas major brand stations tend to have prices that lag the spot market on the way up as well as on the way down," said Williams.
So independent gas stations, "which felt the pain as wholesale prices skyrocketed last summer, are now using this recent price decline as an opportunity to earn back their losses," he said. "This is far from customer price gouging and is more of applying the basic business principal of charging what the market is willing to bear."
Of course, most consumers don't quite see it that way.
But consider this: NACS' industry data for 2007 shows the reported breakeven price on fuel sales to be around 14 cents per gallon on average, according to Eichberger.
Credit card companies take 2.5% of the retail price, "so at $4 per gallon, 10 cents of about all plastic transactions [upwards of 85%-90% of purchases] went to the banks," he said.
Retailer margins averaged 13.7 cents per gallon through the middle of September -- 3.86% of the average retail price of $3.549, said Eichberger, citing data from OPIS. Take away credit card fees of 8.9 cents and there's a net margin of 4.8 cents, he explained.
"With this inequitable revenue split, many gas stations owners felt they were actually working for the credit card companies," said Williams.
In July and August of this year, many U.S. gas stations were earning less than 4 cents to 6 cents per gallon, he said. That's part of the reason gas stations across the country were going out of business, he said.
"While the cost and financing of the product they sold increased, the corresponding margins continued to shrink," he said.
Sharing common ground
So, maybe what's happening now to prices is actually good for consumers and most retailers alike.
"Retailers typically make money as prices go down and lose money as prices go up," said Eichberger.
The lower prices increase consumption as well as store traffic, said James Williams, an economist at WTRG Economics. There's "more money for coffee, sodas, chips and candy, which is where the real profit margin is."
At the same time, consumers have been happy to see prices quickly fall back below $3.
For now, the "bottom line is consumers are receiving a return on their investment," said Sean Comey, a San Ramon, Calif.-based spokesman from Chevron Corp. (CVXChevron Corp
Demand for motor gasoline over the past four weeks was down 3.4% from the same time a year ago, with total petroleum product demand down 7.8%, according to the latest data from the U.S. Energy Information Administration.
By Myra P. Saefong, MarketWatch
Last update: 7:31 a.m. EDT Oct. 31, 2008
SAN FRANCISCO (MarketWatch) -- Consumers tend to notice that gasoline prices drop much more slowly than they rise, but that's not necessarily price gouging at play -- at least not on the retail end.
And this time around, prices have actually managed to drop faster than they climbed.
Prices for the fuel at the pump have dropped every day for the past six weeks, according to data from the Oil Price Information Service. They stood at $2.547 a gallon Thursday, down a sizable 38% from the record high of $4.11 in July.
It took retail gasoline prices about four months to make the $1 climb from $3 to $4 in February to June of this year. But it took only seven weeks to drop back down from $4 to $3 in early June to late July.
Then again, while gasoline prices dropped from their record level in July, crude has also fallen about 55% from its record price that month of more than $147 per barrel.
So while the market sees an unusually quick decline in retail gas prices, consumers cannot ignore the fact that the change in prices is not proportional to the drop in oil.
'Gasoline stations are clearly not the villains.'
Mark T. Williams, Boston University
"Having experienced $4-per-gallon gas, most consumers are now very attuned to the cost of gasoline," said Mark T. Williams, a risk management expert and finance professor at Boston University. And a closer look at the pricing structure will offer a "better understanding of who is the villain here." Mark T. Williams, Boston University
"Gasoline stations are clearly not the villains," he said.
A basic calculation for crude to retail valuation is that 42 gallons in a barrel of crude would translate into about 2.5 cents per gallon gasoline for every dollar in crude, said John Eichberger, a vice president of government relations for the National Association of Convenience Stores.
"This is not a very accurate measure, however, because it is not a direct relationship -- it does not account for other products derived from a barrel of oil, nor for operating costs and profits," he said.
Business wasn't so great
What consumers spend on fuel isn't necessarily what gasoline retailers get.
Williams said the cost of gasoline can be broken down into four distinct components: cost of crude oil, refining, taxes and distribution.
To determine the price at the pump, "all we need to do is to add up these four components," he said. But "you only need to attempt to do this calculation once to realize that there are other factors which influence the cost of gas."
Many consumers believe that major integrated oil companies own retail locations, said Eichberger. "About 55% are branded with contracts signed to sell fuel supplied by a refining company under that refiner's brand," he said. "The rest are privately branded and they often buy directly off the spot market."
And as market traders may know, spot prices can be quite volatile.
"Independents buy their gas from distributors that price it to the current spot market, whereas major brand stations tend to have prices that lag the spot market on the way up as well as on the way down," said Williams.
So independent gas stations, "which felt the pain as wholesale prices skyrocketed last summer, are now using this recent price decline as an opportunity to earn back their losses," he said. "This is far from customer price gouging and is more of applying the basic business principal of charging what the market is willing to bear."
Of course, most consumers don't quite see it that way.
But consider this: NACS' industry data for 2007 shows the reported breakeven price on fuel sales to be around 14 cents per gallon on average, according to Eichberger.
Credit card companies take 2.5% of the retail price, "so at $4 per gallon, 10 cents of about all plastic transactions [upwards of 85%-90% of purchases] went to the banks," he said.
Retailer margins averaged 13.7 cents per gallon through the middle of September -- 3.86% of the average retail price of $3.549, said Eichberger, citing data from OPIS. Take away credit card fees of 8.9 cents and there's a net margin of 4.8 cents, he explained.
"With this inequitable revenue split, many gas stations owners felt they were actually working for the credit card companies," said Williams.
In July and August of this year, many U.S. gas stations were earning less than 4 cents to 6 cents per gallon, he said. That's part of the reason gas stations across the country were going out of business, he said.
"While the cost and financing of the product they sold increased, the corresponding margins continued to shrink," he said.
Sharing common ground
So, maybe what's happening now to prices is actually good for consumers and most retailers alike.
"Retailers typically make money as prices go down and lose money as prices go up," said Eichberger.
The lower prices increase consumption as well as store traffic, said James Williams, an economist at WTRG Economics. There's "more money for coffee, sodas, chips and candy, which is where the real profit margin is."
At the same time, consumers have been happy to see prices quickly fall back below $3.
For now, the "bottom line is consumers are receiving a return on their investment," said Sean Comey, a San Ramon, Calif.-based spokesman from Chevron Corp. (CVXChevron Corp
Demand for motor gasoline over the past four weeks was down 3.4% from the same time a year ago, with total petroleum product demand down 7.8%, according to the latest data from the U.S. Energy Information Administration.
'By making the effort to conserve, [consumers] have helped reduce demand and it's paying dividends by helping to reduce prices.'
Sean Comey, Chevron Corp.
cont.
Sean Comey, Chevron Corp.
cont.
Clearly, if gas prices decrease under Bush, then they will continue to drop if McCain is POTUS. I heard a rumor gas prices may be as low as $1.00 a gallon by Thanksgiving. 
