For some odd reason, now that wholesale crude oil prices are less than half the price they were in July, the price of retail gasoline has stayed more or less the same and I’m not happy about that.
According to Reuters, Friday’s spot price was $63 a barrel. In July, crude was $147 a barrel. (Divide 147 by 63, carry the nine, subtract…to hell with it, where’s the calculator?) Today’s price for Regular Unleaded in the Greater Toronto Area is around 98 cents a litre, or $3.92 a US gallon, more or less. (I’m not being five-decimal-place-precise here, relax. Four litres = 1.057 of a US Gallon, so a simple x4 on the calculator gives you the US price, close enough for our purposes.)
It’s one of those funny coincidences that retail gas prices can spike on a rumour that a refinery worker in Houston has a boo-boo on his elbow, but if the prices drop significantly, it seems to take forever for that ‘expensive’ gas to work its way ‘out of the system’. This, of course, is a load of manure and worthy of some investigation.
A family member used to run a retail gas station, so I have a more than the average inside knowledge of how fuel pricing works in the real world.
A gas pump typically has a 1500 (6800 litre) gallon tank underground. Some are bigger, some are smaller. Two or three times a week a tanker truck brings the retailer the fuel to keep the tanks well filled. At the time of delivery, the retailer pays for the gas, at the wholesale price from an independent distributor, who buys it from the fuel terminal at a distributor’s price. In round numbers, the distributor makes 3 to 5 cents per litre as he or she sells it for the wholesale price to the gas station.
That price is roughly 2 to 3 cents per litre less than what is on the sign outside the gas station; the price you and I pay.
Here’s a bit of math. That 6800 litre load of gas is worth $204 of potential profit to the dealer, as long as the retail price doesn’t go down and the retailer sells every drop.
Put simply, the retailer gets Foxtrot Alpha if prices stay the same. The retailer now owns that gas in the ground. If retail prices go up, say 2 cents a litre from when they filled the underground tank, the retailer can make a little bit more, say $340 on the load.
A bit more math. Most cars have 50 litre gas tanks, some are smaller and SUV’s of course, are bigger, but 50 litres is a good back of the envelope average. That means the retailer has to have 136 customers buy a full tank of gas, to sell that load in the ground and realize the $204 profit in a $6460 (wholesale) purchase.
Guess what happens when prices drop? The oil companies will occasionally offer what is called support. They will credit the retailer with a couple of cents extra per litre, to match local prices, but that retailer still owns 6800 litres of gasoline in the ground at the old price. Every litre he or she pumps at the new, lower price, means they lose money, without support from the oil company.
Of course, getting support is handled on a case-by-case basis. Complain too much and the likelihood of getting support is slim to none. The retailer is stuck with 6800 litres of gas at the higher price and can’t sell it without losing money on every litre. Plus, the retailer can’t get another load of wholesale-cheaper gasoline, until they sell what they have in the ground.
There are other things that happen. On more than one occasion when a price war was escalating, with local brands selling for several cents less than the national brands, a retailer would call for support and be told: “You don’t get any, as it’s Petro-Canada’s (or Shell, or Esso) turn to match them. Don’t expect to sell much gas this week.” Oh gee. Thanks.
Yes, that is technically a conspiracy to fix prices. Except the out is that the retailer has the option to sell the gas at a higher price and that isn’t controlled by the oil company. Sure. Cut into a brands’ market share by not selling as much as the others and see how much support you get. Conversely as a retailer you can try to find 136 people with empty gas tanks and a closed head injury who are dumb enough to buy gas at a significantly more expensive price.
The argument of the oil companies is that the distributor and retailers are independent businesses, so the oil companies have no influence on oil prices, after all it’s the free market at work, right? The distribution terminal is owned by the oil company and that’s the last time the oil company touches the price.
The oil company, naturally, wants to get the most for their product when the distributor takes a tanker load, so the oil company controls the difference between the distributor’s price and the retail price. The oil company looks at the several hundred thousands of litres of gasoline they have in storage in those big white tanks and knows to the fourth decimal place how much it represents as potential profit every hour. Yes. Every hour.
When crude prices go down, as they have in the past few weeks, the oil company can potentially be stuck with several hundred thousands of litres of ‘expensive’ gasoline in inventory. But oil companies are also very skilled at hedging crude prices and keeping the distribution flowing at a fast rate. This reduces the oil company’s risk of being caught with inventory at less than excellent profit per litre.
What happens is, as cheaper crude comes into production, the per-litre profit for the oil company goes up, as the input cost of the crude is less than before. However, the price to the distributor does not get adjusted on an hourly basis. Weekly is more like it. That overlap is where an oil company makes killer profits, after all, “it will take time for the expensive gas to work its way through the system.” Forty-five days is the usual number quoted from a ship tanker of crude to a load of Regular Unleaded in your tank.
As to the veracity of that number, I can’t call ‘bullshit’ and neither can those who make the laws or collect the taxes. When the harsh light of investigation by the lawmakers is turned on oil companies, the oil companies bring out economists who speak a language only other economists understand. The pols get baffled and shrug their shoulders.
The government up here by the way, has a vested interest in keeping prices up. We have (and many states do too) what is called an Ad Valorem tax on fuel. The tax is a fixed percentage on the wholesale price. Higher wholesale prices on fuel means the government makes more money. Lower wholesale prices, means the government makes less. Be assured the oil companies know their tax law cold and can tell to the fine cent exactly how much they owe in taxes every hour.
Just as a final poke in the eye, here’s a little science. A gallon (or litre) is measured at a specific temperature, usually around 15.5 deg. Celsius or 60 deg. F. If the temperature of the gasoline is higher than 15.5 C, it isn’t a ‘true’ litre or gallon: It’s short a teaspoon or two. In metric that would be just about 10 millilitres: Gasoline expands as temperature rises.
Conversely, as temperature drops, you get a bigger litre or gallon, usually a teaspoon or two more than a ‘true’ litre or gallon. Gas pumps, almost universally, across Canada have a temperature compensating meter. Why? Because it is usually colder up here for six months of the year and gas stations would be pumping a ‘fat’ litre. This adds up to lost revenue for the oil companies, as 10 ml over 6800 litres is 6.8 full litres, or roughly $6.80 a load. Multiply that out by how many gas stations and you’ve got some money there in the course of a month.
Oddly enough, in the southern US, the oil companies said they couldn’t refit all their pumps with temperature compensating meters, as it was too expensive.
Or, if you like your conspiracies with a black helicopter, the US oil companies have been pumping ‘short’ gallons for years, as the southern US is warmer than 59 degrees most of the time. The oil company gets a few extra bucks per load, again probably around $7. For some reason they can temperature compensate pumps in a huge country of 33 million, but can’t do it in a single state with 23.5 million people.
Summing up, the game is rigged five ways to sundown. Which means, even if the price of crude has dropped by more than half, we won’t see properly lowered prices until sometime in December.
Gotta love that free market.
RoadDave 