Higher gas prices return

By GARY KAUFFMAN
THE GOSHEN NEWS

January 12, 2009 03:48 pm

— On Tuesday gasoline prices increased by nearly 30 cents at local stations, leaving drivers with one burning question: “Why?”
Like their customers, most local station owners wondered the same thing.
“I don’t know why it went up 30 cents,” said Rita Reitmeier, owner of Marathon stations in Millersburg and Nappanee. “I wish I had a good answer.”
Reitmeier, like most station owners, buys her gas through a wholesaler, which tells her where to set her prices. The prices usually follow trends set by larger chains.
“When they go up, you go up and when they go down, you go down,” Reitmeier said. “If you don’t follow then you’re liable to have a world of trouble.”
Sam, who declined to give his last name but is a member of the family that owns the Clark station on Lincolnway South, said station owners and managers often face the displeasure of the consumers when prices increase.
“They’re upset at you because you’re the one facing the public, not at the big dog sitting somewhere who doesn’t have to talk to anyone,” he said.”We’re caught in the middle between the consumer and the oil company.”

Protecting themselves
So why did the prices suddenly jump by 30 cents?
Ron Freeman, president of Pak-A-Sak/Jay Petroleum, said an increase was needed to essentially protect the retailers from themselves.
Because profit margins on gas are very low, most retailers make their profit on sales from convenience store items. As a result, they’re willing to swap gas profits for more customers inside the store.
“As the cost from their suppliers rises, as it did this past week due to rising crude oil prices, their profit margins shrink to a point where a significant increase in retail price is necessary to meet their operating costs,” Freeman said in an e-mail.
He added that this competitive nature actually helps protect consumers from feeling the pinch at the pump as quickly as the oil prices change.
Some of the price of gasoline remains nearly constant, regardless of how much a gallon sells for. The federal government receives 18.4 cents per gallon and the state of Indiana takes 18 cents, plus 7 percent sales tax. Station owners typically make between 2 and 5 cents per gallon, and the distributors also get a small percentage per gallon.
The remainder goes to the oil companies for purchasing crude oil, refining, advertising and, of course, their profits.

International impact
While Tuesday’s jump was a needed adjustment at a local level, it became necessary because of the state of the world.
“When you look at local retail pricing the first thing people say is, ‘You’re raising the price in my area and there’s no reason for it,’” said Linda Casey, Communications Manager for Marathon Petroleum in Findlay, Ohio. “What most people fail to realize is that it’s not a local issue, it’s an international issue.
“Someone in the Gaza Strip is affecting the prices in Goshen.”
The single biggest factor in oil supplies is the Organization of the Petroleum Exporting Countries (OPEC). This 13-country organization provides about 40 percent of the world’s oil production, and about 40 percent of what the United States imports.
When OPEC reduces output, as it did recently, it can dramatically push the price upward.
John Felmy, chief economist for the American Petroleum Institute, said prices bottomed out at $33 for a barrel of crude oil in December and since then has rebounded to $48 per barrel. Since a typical 42-gallon barrel of crude yields 19-20 gallons of gas, that translates into a 36 cent increase per gallon of gas.
“Crude oil prices have increased for a couple of reasons,” Felmy said. “OPEC has been cutting production, we’ve experienced some colder weather than normal and a little bit is concerns about the Middle East.”
He believes, though, that speculation in oil futures has little to do with the recent increase. He sees it as primarily a supply-and-demand issue.
But politics and natural events worldwide affect the price of oil.
Any change in a political situation, like the current conflict between Israel and Palestine, can created a price spike.
Casey said that a conflict between Russia and the Ukraine has shut down a major natural gas pipeline to Europe. That created a need for more fuel oil there, increasing the worldwide demand for crude.

Acts of God
Natural disasters like hurricanes, especially if they hit an oil refining area like Hurricane Katrina did in 2005, can also create price spikes.
“One refinery just came up to full production (on Thursday) from Hurricane Katrina,” Casey said.
Another smaller factor in oil pricing is the type of oil being produced and refined.
Oil is divided into four categories: Heavy or light, and sweet or sour. Light, sweet crude is the easiest and cheapest to refine, but supplies are running low. Heavy crude remains in plentiful supply, but many U.S. refineries will have to undergo costly restructuring to refine it.
Casey said Marathon has purchased cokers to break up the heavy molecules in heavy crude.
“Those units are very, very expensive,” she said. “But that crude oil is also less expensive to produce.”

Taxing
Felmy said that recent refining costs have decreased to about 3 percent of the cost of a gallon of gas, with some refineries actually losing money on the process.
One price factor the local public can have something to say about is gas taxes. Felmy said Indiana currently has one of the country’s highest state-federal tax combinations.
State legislators and the federal government are both considering increasing those taxes. A 50 percent hike in the federal tax, as some have proposed, would increase the gallon price by 10 cents.
With so much volatility in the pricing structure, predicting future prices is mostly guesswork.
Ron Freeman of Pak-A-Sak said analysts think prices will settle into the low $2 range in 2009 and then rise again in 2010 as the economy heats up.
“There’s really no magic to it,” he said. “It’s a supply and demand business.”