Setting pump prices; What makes up the price of a gallon of gas?

[Wretched Excess]

I thought this was interesting, and I recall that this subject has come up before.

Setting pump prices

What makes up the price of a gallon of gas?

Consider the game of chicken that plays out every day across Pennsylvania Highway 441. In Marietta, where the road hugs the Susquehanna River, a Rutter's Farm Store gas station stands on one side, a Sheetz gas station on the other.

Kelly Bosley, who manages Rutter's, doesn't even have to look across the highway to know when Sheetz changes its price for a gallon of gas. When Sheetz raises prices, her own pumps are busy. When Sheetz lowers prices, she has not a car in sight.

She calls Rutter's headquarters to report the competition's new price and wait for instructions.

"I call a lot of times and say, 'They went down, hurry up! Hurry up! Call me! Call me!' Or it could be where theirs goes up, and I'll say, 'Take your time! You know, I like being busy.' But I have no control over that."

You think you feel helpless at the pump?

Bosley makes a living selling gas -- and even she has little control over what it costs.

So how exactly are gas prices set? What determines the hair-pulling figure you see displayed in large electronic or plastic numbers? Why is a gallon of gas, say, $4.11 -- not $4.10 or $4.12? Why is the price different across the street?

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 last week, setting new record highs all the while.

In the first quarter of this year, based on a retail price of gas 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 gas to taxes to marketing costs to, sometimes, nothing more than the competitive whims of gas station owners.

Not that understanding the breakdown makes it any less cringe-inducing to fill 'er up.

Step by step

First a primer on how gas gets to your tank:

Once oil is pumped from the ground, it can be sold on the spot market, a last-minute trading arena where oil companies and distributors buy and sell to each other, or straight to refiners. After it's brewed into gasoline, the product can again be sold on the spot market, or directly to wholesalers, who in turn can supply their own stations or sell it to other retailers.

Each step of the way, buyers and sellers negotiate a price.

At the starting point of all this is the price of oil -- which, like the oil itself, is nothing if not crude.

The knee-jerk villains 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 gas.

Prices are a function of the open market, the result of futures contracts traded on the New York Mercantile Exchange 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. But 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 prices will rise or fall.

Lately, oil futures have been rising.

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.

The rush of buyers keeps pushing oil futures to a series of new records, and the rest of the energy complex, including gasoline futures, has followed. That pushes up the price of gas that goes into your tank.

"Crude is the driver," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill. "As long as it stays up there, gasoline's not going to be able to decline much at all, even if demand slips. That's just the way it is."

There is some evidence Americans are buying less gas as the price marches higher, and common sense suggests they would cut back even more if gas rose to $4.50 or $5 a gallon.

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," Ritterbusch said. "But it takes a while."

Oil and gasoline prices often move in the same direction, but they aren't linked directly. In fact, while 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.

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 the gasoline produced in the United States, and areas farthest from there tend to have higher prices because of the cost of shipping gas via pipeline and tanker truck all over the country.

Beyond oil

It's not only about the price of oil. Other costs are a factor -- though they've remained relatively stable.

For example, federal and state taxes added 40 cents to a gallon of gas 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 the lowest. (Iowa's is 40.1 cents; Illinois, 57.9; and Missouri, 36.0 cents per gallon.) How the money is used varies from state to state, though the federal take helps to build and maintain highways and bridges.

Marketing and distribution costs -- the tab for delivering gasoline from refiner to retailer -- were 27 cents to start the year, 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.

Maintaining a balance

What happens when that gasoline makes its way to your neighborhood gas 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 on gas. 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.

And you can't keep jacking up the price when drivers are buying less.

Gas 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 gas 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 in.

Thank goodness for beef jerky and sodas.

Most gasoline retailers long ago got past any illusion they can make money selling gas. 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.

"You're always out there competing with the guy next door -- literally with the guy across the street -- and worried too about how you're going to pay for your next supply," said Rayola Dougher, a senior economic adviser at the American Petroleum Institute, the oil industry's trade association.

In the Philadelphia suburb of Havertown, Pa., earlier in the week, Sunoco station operator Steve Kehler received a load of gasoline -- 9,000 gallons -- which, at a wholesale price of $3.729 a gallon, cost him 4 cents more than the previous load.

That left him in a sticky situation: Should he raise prices right away to recoup some of his higher gasoline expenses, or should he hold off for a couple of days in hopes his competitors also will have to raise their prices?

"I'm surrounded by $3.89's, and I'm already at $3.91," said Kehler, referring to his prices and those of some nearby competitors. "I'm going to play a little waiting game right now."

The $33,600 Kehler must pay for his overnight gasoline delivery won't be debited from his bank account for a few days. That gives him a little breathing room, time to hold prices steady. Hiking prices too quickly will hurt sales.

"I'll probably change it tomorrow night, at closing," Kehler said. "I'll go up 4 cents."

That will put Kehler at a gross margin of about 20 cents a gallon. After paying credit card fees, labor and rent, Kehler will be lucky to break even on his gasoline sales.

Of course, the plight of retailers is little consolation for drivers.

Mayra Perez said she works two jobs to help support her family, and gasoline is becoming harder to afford.

She was filling the tank of her car in Miami last week to the tune of $3.89 per gallon.

"This is horrible," she said. "On the weekend, my husband and I use only one car to save on gas.

"But then there's the cost of food, milk, eggs, the rent."

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[Schadenfreude]

My head swirls, just fix the f*cker. 

[Wretched Excess]

My head swirls, just fix the f*cker. 

I hope it only swims.  swirling is something else entirely.

[Schadenfreude]

My head swirls, just fix the f*cker. 

I hope it only swims.  swirling is something else entirely.

I have given up having a civil discussion about $4/gal gas. No swirlies!

[Wretched Excess]

My head swirls, just fix the f*cker. 

I hope it only swims.  swirling is something else entirely.

I have given up having a civil discussion about $4/gal gas. No swirlies!

I hear $5 is a cinch, and maybe higher than that.  probably just in time for november, of course.

[jtyangel]

So this is just as my other half has said...it's nothing more then speculation driving the ****ing cost up(pardon my francais). So that a few traders can earn record amounts or short in the anticipation of a correction or to make 3 or 4 points, you and I get to take it in the wallet for a year or two. We are essentially watching something akin to a stock take off in the marketplace, but not being worth anything near what it is trading for, but a stock, unlike oil, is not a friggin resource.  The plus side is bubbles like this normally burst eventually...in the meantime though

[Schadenfreude]

So this is just as my other half has said...it's nothing more then speculation driving the ******* cost up(pardon my francais). So that a few traders can earn record amounts or short in the anticipation of a correction or to make 3 or 4 points, you and I get to take it in the wallet for a year or two. We are essentially watching something akin to a stock take off in the marketplace, but not being worth anything near what it is trading for, but a stock, unlike oil, is not a friggin resource.  The plus side is bubbles like this normally burst eventually...in the meantime though

F*ckerds!

[Thor]

My head swirls, just fix the f*cker. 

I hope it only swims.  swirling is something else entirely.

WE, sounds like you've been intimately familiar with the wrong end of a swirly!! 

[Wretched Excess]

My head swirls, just fix the f*cker. 

I hope it only swims.  swirling is something else entirely.

WE, sounds like you've been intimately familiar with the wrong end of a swirly!! 

I was making a different play on words

I did a lot of evil shit when I was younger, but I never gave anyone a swirly.  and I certainly didn't ever get one.

[Chris_]

So this is just as my other half has said...it's nothing more then speculation driving the ****ing cost up(pardon my francais). So that a few traders can earn record amounts or short in the anticipation of a correction or to make 3 or 4 points, you and I get to take it in the wallet for a year or two. We are essentially watching something akin to a stock take off in the marketplace, but not being worth anything near what it is trading for, but a stock, unlike oil, is not a friggin resource.  The plus side is bubbles like this normally burst eventually...in the meantime though

That is what I've heard.  I tried to start a thread on this the other day, but it got derailed and smashed to tiny pieces.

This guy thinks that 60% of the current price of oil may be due soley to speculation: F. W. Engdahl

Maybe the speculators needs to be reigned in a little?  Not much, just a tad?  Not that I would trust the current Congress to do anything short of crossing the road or tying their shoes without f**king up.

[Schadenfreude]

My head swirls, just fix the f*cker. 

I hope it only swims.  swirling is something else entirely.

WE, sounds like you've been intimately familiar with the wrong end of a swirly!! 

Hey what about me? 

[Wretched Excess]

So this is just as my other half has said...it's nothing more then speculation driving the ****ing cost up(pardon my francais). So that a few traders can earn record amounts or short in the anticipation of a correction or to make 3 or 4 points, you and I get to take it in the wallet for a year or two. We are essentially watching something akin to a stock take off in the marketplace, but not being worth anything near what it is trading for, but a stock, unlike oil, is not a friggin resource.  The plus side is bubbles like this normally burst eventually...in the meantime though

That is what I've heard.  I tried to start a thread on this the other day, but it got derailed and smashed to tiny pieces.

This guy thinks that 60% of the current price of oil may be due soley to speculation: F. W. Engdahl

Maybe the speculators needs to be reigned in a little?  Not much, just a tad?  Not that I would trust the current Congress to do anything short of crossing the road or tying their shoes without f**king up.

free market, chris.  it is what it is.  I would rather get raped on gas prices than set a precedent like that.

high gas prices will decrease demand.  decreased demand will create downward pressure on gas prices.  it will take a while, but this will sort itself out.

[Chris_]

I feel the same way but the situation still sucks.  Not that it costs me a lot of money -- an extra $10 a week for gas doesn't hurt me.

[Chris_]

So this is just as my other half has said...it's nothing more then speculation driving the ****ing cost up(pardon my francais). So that a few traders can earn record amounts or short in the anticipation of a correction or to make 3 or 4 points, you and I get to take it in the wallet for a year or two. We are essentially watching something akin to a stock take off in the marketplace, but not being worth anything near what it is trading for, but a stock, unlike oil, is not a friggin resource.  :banghead: :banghead: The plus side is bubbles like this normally burst eventually...in the meantime though :banghead:

That is what I've heard.  I tried to start a thread on this the other day, but it got derailed and smashed to tiny pieces.

This guy thinks that 60% of the current price of oil may be due soley to speculation: F. W. Engdahl

Maybe the speculators needs to be reigned in a little?  Not much, just a tad?  Not that I would trust the current Congress to do anything short of crossing the road or tying their shoes without f**king up.

free market, chris.  it is what it is.  I would rather get raped on gas prices than set a precedent like that.

high gas prices will decrease demand.  decreased demand will create downward pressure on gas prices.  it will take a while, but this will sort itself out.

Actually, hight prices will change quantity demanded.  It is a critical difference. 

[jtyangel]

So this is just as my other half has said...it's nothing more then speculation driving the ****ing cost up(pardon my francais). So that a few traders can earn record amounts or short in the anticipation of a correction or to make 3 or 4 points, you and I get to take it in the wallet for a year or two. We are essentially watching something akin to a stock take off in the marketplace, but not being worth anything near what it is trading for, but a stock, unlike oil, is not a friggin resource.  The plus side is bubbles like this normally burst eventually...in the meantime though

That is what I've heard.  I tried to start a thread on this the other day, but it got derailed and smashed to tiny pieces.

This guy thinks that 60% of the current price of oil may be due soley to speculation: F. W. Engdahl

Maybe the speculators needs to be reigned in a little?  Not much, just a tad?  Not that I would trust the current Congress to do anything short of crossing the road or tying their shoes without f**king up.

free market, chris.  it is what it is.  I would rather get raped on gas prices than set a precedent like that.

high gas prices will decrease demand.  decreased demand will create downward pressure on gas prices.  it will take a while, but this will sort itself out.

I agree with WE here...this is a huge bubble...it will pop eventually like others do...think of other commodities, but we may not feel it as acutely when Orange Juice or corn goes up a little. I'd say anything over about 60-80 bucks a barrel is because of speculation.  BTW, if anyone is wondering, my other half's occupation is as a portfolio manager for a group of small funds--he keeps a pretty good pulse on this although he is not a commodities expert. However, what is going on there and in things like the housing markets effect what he does so he keeps an eye. I'm am or was a lowly NASD broker, but that was many many moons ago I watch it more for interest now.

[Flame]

Seriously, though....there is a limit on what we HAVE to buy when it comes to gas...to  get to work, whatever.  Public transport is not an option for many of us.  It's not like we can say "The cost of gas is too high, I'm not buying any" because we really don't have a choice.   Sure, we can  buy less, but I don't think "less" will make much of an impact.

Again, I know a lot of you are rich rethuglicans, and an extra $15 or $30 at the pump is no big deal to you, but it's killing me.  It takes away from my grocery budget, which is also being jacked with because of the increase in food prices.   

Something (and I have no idea what) needs to be done to make this crap stop.

[RobJohnson]

Gas always goes up in price during an election year.

[formerlurker]

Seriously, though....there is a limit on what we HAVE to buy when it comes to gas...to  get to work, whatever.  Public transport is not an option for many of us.  It's not like we can say "The cost of gas is too high, I'm not buying any" because we really don't have a choice.   Sure, we can  buy less, but I don't think "less" will make much of an impact.

Again, I know a lot of you are rich rethuglicans, and an extra $15 or $30 at the pump is no big deal to you, but it's killing me.  It takes away from my grocery budget, which is also being jacked with because of the increase in food prices.   

Something (and I have no idea what) needs to be done to make this crap stop.

It's killing the airlines also, and has caused natural gas and coal prices to practically double.    The price of fuel has pretty much affected everything, and why this isn't the #1 talked about issue driving the presidential campaign I will never know. 

[Lanie]

There's already lower demand. It's not working. The prices keep rising. It's almost like the oil companies are completely out of control.

OTOH, as somebody in customer service, I see people constantly spend money on what they don't need to, so I'm not convinced that society is as bad off as they think over gas prices.

[Tess Anderson]

  retard

When it costs OPEC  two dollars to produce a single barrel of oil, but the same barrel ends up selling for $135+ in the futures market, it isn't the consumer that's driving up the prices.

Stupid ass lefty thinking Americans are too rich and spend THEIR own money foolishly. Drilling for domestic oil would help greatly, but that's make too much sense, now wouldn't it?

[Lanie]

I agree they should allow drilling here. That is the fault of the left on that one. Of course, from what I understand, Alaskans themselves were against it. They said they didn't want their land messed up. But yet the same idea was what made the state turn red in 2004 supposedly. 

That finger wasn't for me, was it?

[Chris_]

Of course, from what I understand, Alaskans themselves were against it.

They were?  When were they allowed to vote on it? 

I'd love to see the issue put on the Alaskan state ballot.  The Alaskans I've met would love nothing more than an increase in their annual Permanent Fund payments.

[Tess Anderson]

I agree they should allow drilling here. That is the fault of the left on that one. Of course, from what I understand, Alaskans themselves were against it. They said they didn't want their land messed up. But yet the same idea was what made the state turn red in 2004 supposedly. 

That finger wasn't for me, was it?

Well, then you don't understand THAT, either. And the state didn't "turn red in 2004 supposedly", it's been red for decades now.

ONE example of this:

To understand why so many of Alaska's 626,932 residents support opening the Arctic National Wildlife Refuge to energy exploration, Americans in the Lower 48 should look to the industry's economic impact in the 49th state.

"I'm not aware of any state, that its revenue is dominated so much by one industry," said Larry Persily, deputy commissioner of revenue

http://www.juneauempire.com/anwr/oilandgas.shtml

THAT's been the history - AK resident have always wanted to open up the land for drilling, but too many clueless whiny liberals in distant states didn't want them to.