Petroleum Marketers Like Low Gas Prices, Too

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Petroleum Marketers Like Low Gas Prices, Too

WASHINGTON -- Motorists may appreciate the recent decline in fuel prices, but perhaps not as much as gas station owners do.

When pump prices skyrocketed after Hurricane Katrina, gasoline retailers were caught in an uncomfortable paradox -- they were accused of gouging at the same time their profits were being squeezed by runaway costs at the wholesale level, reported the Associated Press.

Now the reverse is true. The outrage from consumers and Congress has died down just as gas stations around the country are reaping some of their best returns at the pump in years by passing along huge savings at the wholesale level as slowly as possible, according to the AP report.

"We just had a two-week period there with our best margins in two years," Bill Douglass, who sells Exxon- and Mobil-branded gasoline at 14 locations around Dallas and distributes fuel to 165 others, told AP.

Douglass and other retailers are benefiting from the fact that the spread between wholesale and retail prices is almost twice its normal size. Since the beginning of September, wholesale prices have fallen by more than 40 percent, while retail prices have come down just 11 percent, according to U.S. Department of Energy statistics show.

Nationwide, the average gross profit margin at the pump was 37.2 cents per gallon for the week ending Oct. 17, compared with 7.9 cents per gallon a year earlier, according to the Oil Price Information Service of Wall, N.J. OPIS said this sweet spot for retailers would only last "another week or two."

The lagging decline in retail prices is not accidental and the industry is not apologetic about it. It's important to "do some catching up," Douglass told AP, because after Katrina, when wholesale prices spiked, many retailers -- particularly those selling unbranded gasoline -- lost money on every $3 gallon of gasoline they sold.

Notwithstanding the additional profits they have enjoyed in recent weeks, retailers said the real windfall is being collected in other segments of the industry, according to AP.

Companies such as Exxon Mobil Corp., Chevron Corp. and BP plc, which extract oil from the ground, refine it into gasoline, diesel and heating oil and then sell these fuels on the wholesale market, are indeed making bundles these days. And while these so-called integrated oil companies also sell fuel at the retail level, that is a small and shrinking segment of their business, AP reported.

Of all the places to buy gasoline in the United States, less than 10 percent are owned by companies that produce or refine oil, according to the Department of Energy.

That is down 50 percent from 1998, reflecting a concerted effort to shed these less profitable assets. ExxonMobil, the world's largest publicly traded oil company, is expected next week to report an $8.9 billion third-quarter profit, a 56 percent increase from the year before. Similarly soaring profits are forecast for its rivals.

"That is where the money is going," Don Stephenson, president of Cary, N.C.-based Cary Oil Co., which owns 11 gas stations and distributes fuel to hundreds of others, told AP.

John Felmy, chief economist of the American Petroleum Institute, a trade group that represents major oil companies, said in the report that retailers were pointing the finger elsewhere because "nobody wants to be the villain in the story."

"This is a cyclical business and so there is always someone in the supply chain who wins and someone who loses," Felmy told AP.

The Energy Department estimates the revenue from a gallon of regular gasoline usually gets split this way:

-- 50 percent to the producer of the crude oil.

-- 27 percent to the refiner that turned it into gasoline.

-- 15 percent to taxes charged by federal, state and local governments.

--8 percent for the companies that distribute and sell the gasoline.

The retailers' share is "the smallest component of what customers pay for gas, but they are the ones that are under the spotlight and take the most heat, whether prices are rising or declining," Jeff Lenard, spokesman for the National Association of Convenience Stores, an Alexandria, Va.-based trade group, told AP. Earlier this year, the trade group bemoaned the fact that retailers' profit margins were at a 20-year low because of rising credit-card transaction fees and increased competition from Wal-Mart, Costco and other discounters that sell inexpensive gasoline as a way to lure consumers into their stores.

Gasoline retailers have responded by building bigger facilities that offer more snacks, sodas and services, such as car washes and ATMs, in an attempt to boost their bottom lines, AP reported.

Over the course of a year, gasoline retailers average gross profit margins of 10 cents to 12 cents per gallon. But in recent weeks, some have earned quadruple that amount, Lenard told AP.

The average retail price of regular unleaded gasoline is $2.73 per gallon nationwide, while wholesale prices per-gallon range from $1.60 on the Gulf Coast to $1.75 on the West Coast.

"This weekend, gasoline retailers are probably going to have the best margins they've had all year," said OPIS oil analyst Tom Kloza in the report. "Yet people aren't going to be particularly ticked off because they'll figure 'Hey, I only paid $2.50.'"

One reason pump prices may be falling more slowly than normal is that many retailers are on "allocations," meaning they can only purchase a limited amount of fuel every day because of tight supplies in the aftermath of back-to-back hurricanes. Under these circumstances, gas station owners said in the AP report that they risk running out of fuel if they drop their prices too low and penny-pinching motorists line up at their pumps.

The good news for motorists is that pump prices are likely to head even lower in the weeks ahead based on current trends. Kloza told AP he expects to see retail prices below $2 a gallon in some markets by the end of this year, even though the nationwide average isn't likely to fall below $2.25 a gallon. And by then, retailers' profit margins will be back to normal.

"The joke in our industry," Stephenson, a 21-year veteran, told AP, "is that when business is good, it's going to turn bad, and when it's bad it's going to turn good. I just can't tell you when."