Sat, May 24th - 11:01AM
$4 a Gallon Gasoline
You think you feel helpless at the gas pump?
Even the people who sell the gasoline have little control over what
it costs. So, how exactly are prices set? What determines the
hair-pulling figure you see displayed in large electronic or plastic
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. Gasoline in Phoenix averaged $3.69 a gallon Friday, and AAA Arizona experts predict that instead of falling like normal after the holiday weekend, prices will continue to rise across the state. In the first quarter of this year, based on a retail price of gasoline 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 gasoline to taxes to marketing costs to, sometimes, nothing more than the competitive whims of local station owners.
Not that understanding the breakdown makes it any less cringe-inducing to fill 'er up.
The price of oil
The knee-jerk villains in all this 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 gasoline.
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. 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. On Thursday prices soared to nearly $135 US per barrel.
The falling dollar
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 haven in the turbulent stock market.
The rush of buyers keeps pushing oil futures to a series of records, and the rest of the energy complex, including gasoline futures, has followed. That pushes up the price of gasoline for your tank.
Evidence exists that Americans are buying less as the price marches higher, and common sense suggests they would cut back even more if the price rose to $4.50 or $5.
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," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill. "But it takes awhile."
Oil and gasoline prices often move in the same direction, but they aren't linked directly. In fact, although 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.
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.
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 of the gasoline produced in the United States, and areas farthest from there tend to have higher prices because of the cost of shipping fuel via pipeline and tanker truck all across the country.
Add higher taxes in places like California and New York, and the price goes higher.
Oil companies insist their earnings, measured against revenue, are in line with other industries'.
On top of that, rising oil prices have sharply cut profit margins for refining, and that hits the major oil companies, which both pump oil and refine it for use as gasoline.
A giant like Exxon Mobil can handle the blow.
Its profits from refining and marketing for the first quarter were down 39 percent from a year earlier, but Exxon still banked a nearly $11 billion profit because of the hefty prices earned on crude it pumped out of the ground.
Smaller refiners aren't so fortunate. Sunoco Inc.'s refining-and-supply business lost $123 million in the first quarter, hurt by lower margins. Tesoro Corp. lost $82 million for the same period.
In any case, huge profits at big oil companies like Chevron and Exxon Mobil aren't because of high prices at the pump. Their enormous profits are tied to their exploration and production arms, which are benefiting from record crude prices.
Other costs are a factor, though they've remained relatively stable.
For example, federal and state taxes added 40 cents to a gallon of gasoline in the first three months of this year, roughly the same amount as they added four years ago.
California's 63.9 cents of tax is the nation's highest; Alaska's 26.4 cents is the lowest. How the money is used varies from state to state, though the federal take helps build and maintain highways and bridges.
Marketing and distribution costs, the tab for delivering gasoline from refiner to retailer, started the year at 27 cents, 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 United States, 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.
To the pump
What happens when that gasoline makes its way to your neighborhood 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. 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.
You can't keep jacking up the price when drivers are buying less.
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.
Stations pay tens of thousands of dollars for each shipment before they see a cent in the register. Eventually, many make only a few cents on a gallon of gasoline, a margin that can disappear altogether when credit-card fees are added.
Most gasoline retailers long ago got past any illusion that they can make money by selling gasoline. 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.
Learn more about the rise of oil prices at Hundred Dollar Oil.