Fuel Prices

[MEDIK418]

It’s me again. I apologize for walking out of this debate some time back but I got busy and wanted to do some research before I weighed in again. I have been told for so many years that the price of gas is market driven and that was that. It gave me a warm fuzzy thinking I was in on some great secret that nobody but us insiders could ever understand and all you poor fools were just going to have to suffer your ignorance. Truth was, I had little clue what drove the price of gasoline at the pump or the refinery up or down.

My arguments of past haven’t changed and as limited as they were in detail, they still stand true. The market does indeed drive the price at the pump but there’s a lot reasons and none of them have anything to do with “Big Oil” trying to scam us.
Have you ever wondered why the big oil companies have NEVER been found guilty of price gouging? There have been plenty of investigations and don’t tell me it’s the republican cover-up either. There have been plenty of Democrats whining over the years and so far, not one oil refiner has been found to be gouging anyone.

I read where someone here claims they’ve never talked to an oil company employee who wouldn’t defend his company to the bitter end. I say he hasn’t talked to anyone I know. This is the oil belt here sir and most of the employees in these parts spend the better part of their existence trying to find ways to screw the company or bring to light the ways the company is trying to put it to them. You’ll almost never hear one defending the company name unless you count the number of times they try to correct the spelling of “Mickey mouse outfit”

The cartoon “Dilbert” is a great example of how most of us here feel about the people who run this place.

But as evil as we think they are, we all understand that as prices go up and down, we get it in the arse just like everyone else in the country. We simply choose to whine about the price of Nikes and bottled water instead of gas because we understand what it takes to make a gallon of it and knowing that, it’s hard to find fault with the cause of our grief when it’s our efforts, good or bad, that go into how much we pay at the pump. I think that, more than company loyalty may be cause for any defensiveness you will find with an oil company worker.

Why the high prices?
First off look at what it takes to make a gallon of gas. It’s amazing it’s not higher than it is. Take for example the natural gas bill for one month. Two months ago our balance sheet showed a gas bill of $275,000 for one month. In December, that price will double for us just like the rest of you. Every process here relies on heat, chemical reactions and electricity. Two of these are paid for just like you do for your house. We don’t get any breaks on price either since we buy the stuff from outside firms who don’t care how much we have to spend for it. If we don’t buy it someone else will.
Crude oil prices: There a number of costs that make up the price of a gallon of gasoline. Utility costs, maintenance costs, marketing costs and of course, crude oil prices which make up 44 percent of the price of a gallon of gas. If crude goes up, that 44% is bigger, so goes the reduction of crude prices.

By the way, did any of you notice that OPEC announced last week that our oil companies needed to increase our refining capacity so we wouldn’t have shortages when disasters like Katrina hit us? Aren’t these the same guys who not 6 months ago said the United States uses too much oil ( fact is we use about 10 times more than any other country on the planet) Do you think that they’re hurting now that we can’t refine as much as they are used to sending us and it’s scaring them a little. If we stop buying their oil, they’ll be in a bad way in a short time.


Ok, enough stonewalling. Why does the price of gas fluctuate so much if the big oil companies aren’t causing it? It’s really pretty simple when you start to root out all the garbage that goes on to buy a gallon of it.
Let’s say you are a jobber. He’s the guy who delivers the gasoline to the gas stations, convenient stores . . . wherever. I’ve laid a lot of blame on jobbers in years past for the ridiculous jumps in gas prices and still do but now it’s tempered with a little more understanding of how the system works. I laid this blame after watching the price of gas out the door at this plant remaining the same through a three week period that saw fluctuations of over 40 cents a gallon in our area.

Anyway, you’re a jobber. Your primary responsibility is to make sure the people you supply gasoline to have a constant supply to sell. Most jobbers have contracts with outlet stores and are committed to see they have product to sell. If you can’t supply the product, they can’t buy, if they can’t buy, they go out of business. They go under, pretty soon you start to lose enough customers that it’s looking bad for Christmas this year. If they go under because you couldn’t keep up your end of the contract . . . can you say lawsuit?
It stands to reason that the jobbers have good reason to be competitive enough to maintain a reliable supply to their customers.

Let’s have a hurricane. Better yet, let’s have one that takes out roughly 30 percent of the nation’s refining capacity. Add to that the loss of 45 percent of the offshore wells we get our oil and natural gas from. Shoot. . . let’s don’t even go that far. Let’s sink an oil tanker in the Red Sea. Gee. . . That might happen again, or the oil transporters may choose not to send as many tankers that way until the danger is over. Whatever the reason, Americans will start to panic buy at the pumps. Think it ain’t so? Look what happened after Sept. 11, 2001. People went nuts in this country and if you were one of the knot heads who ran to the pumps after it happened, I’m talking about you. The only reason they went nuts like that was a fear that the oil refineries were next. Oh My!

Before any of you think I thought this up, think again. I did a lot of research with oil industry publications and some of the marketing people in our company and some of the few jobbers I know around here. There’s no big secret about how it works but not many people understand it so here’s my limited view of what I found.

When these calamities occur, jobbers begin to bid higher for the gasoline they buy. Ever hear about gasoline futures? Jobbers buy gasoline on huge bundles. Month by month or week by week, they buy gasoline today for the empty tanks of three weeks from now. Forget the time intervals as they vary depending on the customer base and average sales volume for that jobber. They see a problem on the horizon and they start to worry. People panic buy. That’s a fact of life so you might as well prepare for it. He starts to bid higher for the gas he needs next week or even tomorrow.

Pretty soon all of them are in a bidding war in hopes of maintaining inventory so outlets don’t go dry. Once the bidding goes through the roof, they have to raise the price at the pump to offset the price he just promised to pay three weeks from now. Typically, jobbers don’t have the “deep pockets” the big guys do and to expect them to be able to absorb the temporary deficiency is often asking a lot.

Who are they bidding? The refiner, that’s who, Please don’t insult your own intelligence by trying to rationalize how a responsible refiner would refuse the higher bid so everything will be fair and everyone will be happy. They’re in this for the money. They accept the high bids happily. If the bids go high enough for long enough, the margins start to go higher and they make obscene amounts of money from it.

Margins are those magical costs versus profit leftovers. If it costs 40 dollars a barrel to process everything you can wrench of a barrel of oil and you can sell all of the resulting products for 50 dollars a barrel, you have a 10 dollar a barrel (profit) margin. It’s also called crack spread. Normally it takes a 3-4 dollar margin for a refinery to stay afloat. Anything less and you are in the red. Most years, you try to balance the red with the black and hope the end result is the right color.

As I said, oil companies are completely and totally at the mercy of the almighty margin. An oversimplification is that while they do have some blame for the steady state price of gas, they don’t have much control over margins.

Recently (last year or two) calamities of one sort or the other have conspired to cause jobbers to make those god-awful bids simply due to uncertainties in the oil market. No one thing caused it but rest assured it was all based on how they perceived you and I would react to the news. Some of the costs are from the big guys having to spend more in utilities and raw products but those are slow in coming. Don’t take my word for it, look at the business section of your local newspaper. The refinery prices have been in there for years for all to see.

I’ve said it for years and will continue to say it. If you want the price of gasoline to go down, stop driving so much. Eventually, after figuring out the wars, hurricanes and every other short term calamity, the price will come down. It’s been proven over and over again. Look back over the gas prices for the last ten to twenty years and you can’t argue that point. Not so much because we’ve driven less but because when the “emergency” is over, things tend to go back to normal. If you stop driving as much as we do now, the market simply won’t bear the glut and the price will work its way down.

Want to stop the sudden jumps at the pump? Stop being the idiot who runs to the gas pump every time an oil well blows up in Iraq or some terrorist decides to make a threat that might . . . MIGHT affect some small part of the oil industry. We’ve seen first hand how we can lose over a third of our refining capacity in this country and after the initial freak-out by the press and the numbskulls who believe everything they see in the news; we can bounce back pretty quickly. True, we’re not back to the norm of a year ago but we’re headed that way and barring any sort of major disaster we should be back to business in 8-12 months. Gas prices may never go back to the dollar and a dime levels we saw a while back. It simply costs more now to make a gallon of it. I do believe that we will see another half dollar come off after everything is back up and running in the Southern half of our world.

OK, I’ve opened Pandora’s box, let the stoning begin.