Gas Price

[ctenidae]

how is it required when the oil companies are making the profits they do. none of them are hurting for cash.....

Capital Expenditures budgets for a few major oil companies:
Petrobras: $224B through 2014 (~$55B/year)
ExxonMobil: $33-$37B/year through 2015
Chevron: $33B/year

Exxon has $7.8B of cash, Chevron has $16B, Petrobras about $30 at 2010.

Not exactly swimming, there.

 

[ski_resort_observer]

how is it required when the oil companies are making the profits they do. none of them are hurting for cash.....

Lots of obvious reasons. One would be if a company wants to build an oil platform offshore it takes several years and millions of dollars in cost/investment before one drop of oil is produced.

 

[Geoff]

The end seller, the gas stations, have unreal low margins on the gas they sell. They are the ones most sqeezed when the price goes up.

You have this backwards. When the price goes up, the small retailers have a commodity sitting in their buried tanks that they can sell at a much higher margin. The chains that change prices daily to reflect the spot market price do very well every time the price spikes. On the flip side, if the price of gasoline drops dramatically, the little guys are stuck with inventory that either won't move at all if they keep their pricing or will cause them a big loss when they sell it at the retail market price.

I don't know this for sure but I'll bet that a lot of the bigger gasoline retailers insure their inventory by buying options. You don't want to have millions of gallons of inventory and have the price drop 20% on you.

The same logic applies to the monster oil companies. During price spikes, all their inventory magically becomes worth a lot more. That's why you always hear the "record profits" smear stories and congressional inquiries about Exxon-Mobil every time gasoline gets expensive at the pump. You never see the news stories about dwindling profits when prices are declining.

 

[o3jeff]

Luckily I have a company car.

 

[ctenidae]

You have this backwards. When the price goes up, the small retailers have a commodity sitting in their buried tanks that they can sell at a much higher margin. The chains that change prices daily to reflect the spot market price do very well every time the price spikes. On the flip side, if the price of gasoline drops dramatically, the little guys are stuck with inventory that either won't move at all if they keep their pricing or will cause them a big loss when they sell it at the retail market price.

I don't know this for sure but I'll bet that a lot of the bigger gasoline retailers insure their inventory by buying options. You don't want to have millions of gallons of inventory and have the price drop 20% on you.

The same logic applies to the monster oil companies. During price spikes, all their inventory magically becomes worth a lot more. That's why you always hear the "record profits" smear stories and congressional inquiries about Exxon-Mobil every time gasoline gets expensive at the pump. You never see the news stories about dwindling profits when prices are declining.

You're both right, to an extent. The sudden swings are good on the way up, but bad on teh way down. In teh end, it balances out to gas stations making, on average 1-3 cents per gallon. This is why cash prices are generally cheaper, because the credit card companies are charging fees that amount to up to 10 or more cents per gallon- and it gets higher the higher gas prices go.

Gas sations can't really play int eh optins market- their supply cycle is measured in a couple of weeks, not in the month or more of options contracts. Plus the small volume means any protection gets eaten up in transaction fees, and the cost of the protection eats up even more.

The big retailers have some advantage in their ownership of the end of the supply chain, the trucks that bring the gas form the pipeline terminal to the stations, so they're not giving up all of that margin to an outside group, but the majority of branded sations are run by independent franchisees, not the company with the name on the sign. I think Hess and Lukoil are the only real exceptions to that rule.

All of the gasoline in any station you go to comes out of the same spigot on the same pipeline. The difference between the brands are the additives that are mixed in at the truck- Exxon, for intance, has a facility at the truck filling station with all of their proprietary additives that they mix in. There are also generic additive companies, often run by the independent suplliers that cart gasoline to independent stations. So, all of the gasoline that you get is at base the same- Exxon stations don't sell Exxon gas, they sell generic gas with Exxon additives.

Refiners can get squeezed the same way as gas stations, actually. When oil prices spike, they have to pay more for their inputs. However, it can be several weeks before that high-cost product makes it into the system, during which time the price of oil may have fallen again, so they're selling high cost product into a market that thinks it should be low cost. Again, it tends to balance out over the longer term as cycles move around, but ther'es a lag in teh system- that's why you don't see gas prices dropping quickly when oil prices drop. Of course, it just makes good business sense to raise prices quickly when you can, to cover teh inevitable loss on the drop later on.

 

[hammer]

Refiners can get squeezed the same way as gas stations, actually. When oil prices spike, they have to pay more for their inputs. However, it can be several weeks before that high-cost product makes it into the system, during which time the price of oil may have fallen again, so they're selling high cost product into a market that thinks it should be low cost. Again, it tends to balance out over the longer term as cycles move around, but ther'es a lag in teh system- that's why you don't see gas prices dropping quickly when oil prices drop. Of course, it just makes good business sense to raise prices quickly when you can, to cover teh inevitable loss on the drop later on.

The average consumer sees price spikes at the pump as soon as oil prices rise (even though the product in the tanks is cheaper), but the drop always trails the drop in oil prices (because the product in the tanks is more expensive). Not sure how this can be explained other than opportunistic actions on the part of the gas stations...

As far as the tight margins are concerned, if there wasn't any money to be made the gas stations would close shop. Must be enough profit at the pump to get by.

 

[ctenidae]

The average consumer sees price spikes at the pump as soon as oil prices rise (even though the product in the tanks is cheaper), but the drop always trails the drop in oil prices (because the product in the tanks is more expensive). Not sure how this can be explained other than opportunistic actions on the part of the gas stations...

As far as the tight margins are concerned, if there wasn't any money to be made the gas stations would close shop. Must be enough profit at the pump to get by.

The gas pumps are a way to get people into the convenience store to buy high margin items, generally. Or to draw people into the garage.

Gas prices going up are opportunistic, to be sure- the function they end up serving is to help the gas stations maintain a margin of some sort. If gas station owners were gouging, you'd expect to see a wider variability in pricing station to station- some people would be charging every penny they thought they could, while others would be undercutting the hell out of everything. Instead, prices are remarkably consistent- the biggest variance between stations I recall is on the order of 10 cents. In the end, they're all paying about the same price for the same product at about the same time. And consumers are savy and generally go to wherever gas is cheapest or most convenient or both.

 

[drjeff]

Saw a "pump patrol" ticker scrolling across the bottom of the morning news here in Utah today - a low of $3.27 upto $3.59 for regular across the state here is what I saw. I wonder if some of this "cheap Utah gas" would work in my CT car?

 

[ctenidae]

Saw a "pump patrol" ticker scrolling across the bottom of the morning news here in Utah today - a low of $3.27 upto $3.59 for regular across the state here is what I saw. I wonder if some of this "cheap Utah gas" would work in my CT car?

Yeah but CT will probably send you a tax bill for any miles driven not paying CT gas taxes...

 

[SKIQUATTRO]

several of the stations around me are closing as they needed new tanks and cant justify/afford the $500K to put a new tank in so they are now just repair shops and pulling the tanks..

 

[ski_resort_observer]

Geoff....Gas stations do not exist in a vacuum. If they raise prices, as you propose, and it results in having the area's most expensive price they know drivers will bypass them for stations charging a cheaper price. It's much more complicated then just changing the price on the sign.

A busy gas station can recycle their deliveries every couple of days. The gas station I worked at as a kid got delivries everyother day during the busy summer season. Daily prices on the Spot Market was a non factor. This depends, of course, on how much storage they have. Putting in more storage tanks is much complicated nowadays and expensive then simply digging a hole in the ground and dropping in a new tank. Gas stations have always had tight margins and have to make up for that with high volumes and as mentioned supplement their revenue with convenience store purchases if they don't do repairs or sell tires.

CA has higher prices as CA law requires a special blend, high property taxes and one of the smallest number of gas stations per capita in the nation according to the Pres of the CA Assoc of Gas Dealers interview I watched on Wed morning on CNBC

 

[Geoff]

Geoff....Gas stations do not exist in a vacuum. If they raise prices, as you propose, and it results in having the area's most expensive price they know drivers will bypass them for stations charging a cheaper price. It's much more complicated then just changing the price on the sign.

Show me where I ever suggested that?

When prices spike, everybody raises their at-the-pump prices at the same time based on the spot market price. Every gas station owner looks at the same Nymex RBOB Gasoline Future every day to set their prices. You know to the penny what every gas station you compete against in town is going to do that day.

When prices tumble, those at-the-pump prices are much slower to drop... particularly in small towns that don't do much volume.

 

[ctenidae]

Don't forget the supplier link in the chain, too. The guys who deliver the gas to the station set a selling price that the station has to pay. They themselves have to pay at the terminal, a price set, depending on the pipeline, by either the pipeline operator or by an aggregator who is feeding the product into the lines. The refiner who sells into the line is trying to get a price that gets their margin based on the price of the oil they're processing then. The tanker company or pipeline supplying that crude gets a margin, setting price based on the producers pricing. The producer is willing to sell at a price that justifies the expense of drilling the well in the first place.

Point is, at every step the price gets reset, and it takes a couple of weeks for it to flow through. Stations have to price today to cover the cost of the next delivery, and the delivery company is charging today to cover tomorrow's deliveries. When spot prices go up, retail prices go up to cover the increased cost coming through the line. NYMEX prices (even though that's not what anyone actually pays) don't fall suddenly, either, at least not off a spike. Your station owner is making the right business decision when setting prices up quickly and down slowly. If you don't agree with the practice, take your business elsewhere. But you better hurry, because they won't be there long.

 

[riverc0il]

Reality check time on the gas price increases: a ten cent increase on a 15 gallon tank is an additional $1.50 at the pump. The total price increase in the past few weeks is half a six pack of craft beer, a pack of cigs, a little more than your latte at starbucks (give or take depending upon area and specifics). I'm far more concerned with price increases on the back end as transportation prices increase which then increase the price of goods. I continue to find it fascinating how much a few cents here and a few cents there sends consumers off the deep end... the same consumers that would not make other purchases based only on the difference of a few dollars (similar margin). Would you go to XZY Discount to save $3 on a $100 purchase or stick with a known brand retailer with a good return policy and good service? Is an extra $10 in gas going to make you change your big vacation plans? $10 more in gas is making people not want to spend $1000 in total vacation? $10 more in gas a week is not making people go out and do the same things they used to? Isn't that ridiculous considering how many frivolous things we spend our money on? There is absolutely a population of citizens that $10 will make or break and I understand they have a tough go whenever even a minor change happens. Personally, I don't notice on my bank account statement when I pay an extra two bucks at the pump to fill up. I'm certainly wasting way more than two bucks each week buying crap I don't need, ordering take out, and in general not using my money at 100% efficiency.

 

[deadheadskier]

I put 35K miles per year on my car. An increase of a dollar per gallon is roughly $1400 per year for me. To put that in skiing message board perspective, that's almost double what I spend in a ski season on a season pass and lift tickets for myself. I don't consider that an insignificant amount......

 

[ctenidae]

I put 35K miles per year on my car. An increase of a dollar per gallon is roughly $1400 per year for me. To put that in skiing message board perspective, that's almost double what I spend in a ski season on a season pass and lift tickets for myself. I don't consider that an insignificant amount......

If you drive that much, you should get a car that gets better than 25 mpg. Or write it off against your taxes.

You must be filling up yur car twice a week for it to cost you an extra $27 a week for a $1 increase.

 

[deadheadskier]

Car averages about 25MPG. 35K / 25MPG = 1400 gallons per year.

Next vehicle I purchase, I will be looking for something that gets 30+. It just doesn't make sense to make that switch now as my car is paid for and is still running great.

 

[ctenidae]

Looking at spot vs retail gas prices, and it seems the idea that retail prices don't come down as quickly as spot prices is pure hokum, much like Firday the 13th and full moons. The retail price lags the spot price by about a month on teh way up, but bottoms at the same time.

Spot price peaked at 3.69 in June 2008 (monthy average, LA RBOB), but average retail peaked in July 2008 at $4.09. Average spot hit $3.37 in April 2011, retail didn't peak until May at $3.93. December 2011 saw a bottom at $2.70 and $3.28.

In between the peaks and valleys, it seems like gas prices move a little slower both up and down. Even in extraordinary price movements since 2003, of the 34 months that retail was more than 1 standard deviation away from the average difference with spot, it was 18 times above, and 18 time below the average difference.

Post-Lehman Bros, spot bottomed at $1.11 in December 2008, retail hit a low of 1.68 that same month.

 

[deadheadskier]

Post-Lehman Bros, spot bottomed at $1.11 in December 2008, retail hit a low of 1.68 that same month.

It's that number right there that puts speculators in my cross hairs. Did they honestly believe the economic crash was going to drive demand for oil down to less than 50% of what was needed during the prior summer when the price was $4.09?

Just seems to be far too wild a swing for normal supply/demand forces. Maybe I'm wrong

 

[ctenidae]

It's that number right there that puts speculators in my cross hairs. Did they honestly believe the economic crash was going to drive demand for oil down to less than 50% of what was needed during the prior summer when the price was $4.09?

Just seems to be far too wild a swing for normal supply/demand forces. Maybe I'm wrong

Again, not denying some speculative impact, but prices of gasoline were right back in the 2005-2007 sort of average area by June of 2009- around the end of 2008, no one was doin' nothin'- markets essentially shut down around the world. So, what's the value of something no one is buying? That bottoming was just as much an overreaction as the high was. Looks like gas price volatilty was actually higher 2004-2008 than it has been 2009-2012. Certainly from early 2009 to early 2011, the spread between spot and retail has been incredibly consistent.

I don't have an agenda to convince you one way or the other, or to protect speculators. I just htink that having a singular viewpoint and assuming one cause for any event is dangerous- there are forces at play far beyond a prop desk trading commodities futures, and to ignore that fact can only need to poor decisions and inappropriate reactions. As I said a while ago, teh kneejerk reaction of demanding physical delivery is dangerous, and is much more likely to cripple the markets than anything else.