Retailers Ride Gas Volatility

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Retailers Ride Gas Volatility

WICHITA, NEW YORK and INDIANAPOLIS -- 2008 will be remembered as the most volatile gas retailing year in history, with retailers hoping to steady their fuel businesses into the new year.

"We don't ever want to experience another year like this," Mike Thornbrugh, spokesman for Tulsa, Okla.-based QuikTrip, told The Wichita Eagle. "The higher the price goes, the more difficult it is to manage it."

"Extremely volatile," described Tom Palace, executive director of the Petroleum Marketers and Convenience Store Association of Kansas. "A huge, huge challenge for every one of our members."

Gas prices started the year high and marched steadily upward through the first six months of 2008, peaking at more than $4 in mid-summer in many parts of the country.

Then came the rapid decline—gas prices fell to around $3 by late September, crossed the $2 threshold in late October, and settled in around $1.50 this month.

Gas prices tumbled to their lowest level Friday in nearly five years. Crude futures rose, but analysts believed it was a temporary pause in an extended, downward arc as the recession spreads, according to an Associated Press report.

"We’re paying about a billion dollars per day less than we were in July" for gasoline, said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service. "We could probably bail out some banks and maybe even some of the auto companies with the savings."

But cheap gas is bittersweet news. The AP reported that pump prices were driven down mostly because Americans are staying home more. Transportation Secretary Mary Peters said the travel habits of Americans are "fundamentally changing" as drivers clocked 9 billion fewer miles in October, even as gas prices plunged.

All these ups and downs in the oil arena is a huge challenge for gas retailers of all sizes, many of whom struggled with plummeting inside store sales volumes as gas peaked near $4.

Some smaller retailers could barely pay for a 10,000-gallon tanker of gas when costs soared to $37,000 to $40,000 this summer, Palace told The Wichita Eagle.

Then, as prices fell, less-vigilant independent retailers began struggling with a new harsh reality: retail prices were falling quickly enough to undercut the prices independents paid to fill their tanks.

Some sellers nationwide were paying $2 a gallon for a tank that had to be sold at $1.80 to remain competitive. Business choices had to be made—either keep per-gallon prices up to cover costs, or sell the gas at a loss to keep up with competing stores.

"The prices were changing every single day, sometimes multiple times a day," Palace said.

But this month, gasoline retailers are reportedly much happier than they were in July.

"Low gas prices are good for every retailer, but they've really been good for QT," Thornbrugh said.

"People simply have more income to come in and buy our inside items. While the demand for gas has gone up, people … have the discretionary income again to come in and buy a QT Kitchens item, a candy bar, a soda. It's had a profound effect on our inside sales."
In related news, the plunge in oil prices took the bloom off of selling E85 ethanol for Indiana gas stations, according to a report in the Indianapolis Business Journal. What’s more, a state fund supporting an 18-cent-a-gallon tax credit for gas stations selling E85 was exhausted in the first three months of the state’s new fiscal year.

"Right now, you have to be pretty green to use E85," said Ed McClure, CEO of Marion, Ind.-based McClure Oil Corp., which sells E85 at its stations in central and northern Indiana. He added sales of E85 have "definitely slowed down."

Even though many stations in the Indianapolis metro area reportedly sold E85 at a nickel a gallon cheaper than gasoline this month, E85’s lower fuel economy meant the actual cost to the motorist could be 50 or 60 cents more per gallon than gas.

That’s in stark contrast to June, when gas prices soared to $4.19 a gallon. Then, E85 could be purchased for 30 cents a gallon less than gasoline even after accounting for its lower fuel economy.

"In June or July, we could sell E85 blindfolded," said Jim Gentry, fuel purchasing manager for Greenfield, Ind.-based GasAmerica, which operates more than 80 stations in the region and was among the first to sell E85 in the Indianapolis area. "Back in the summer, we didn’t need the 18-cent [state tax] credit."

The tax credit enacted in 2007 helped spur a dramatic increase in the number of stations selling E85. The fuel is now offered at 121 stations across the state, up from just one in Terre Haute in 2005.

But the tax credit didn’t last long. "We blew through that money," said Kellie Walsh, executive director of the Central Indiana Clean Cities Alliance, a federally funded program encouraging the use of alternative fuels.

"I am anxious to see whether gasoline prices dropping has our flex-fuel customers continuing with E85 or if they’re going back" to gasoline, added Walsh.

Gasoline stations that have signed on to sell E85 have grown accustomed to wild cycles in ethanol relative to gasoline. Walsh expects gasoline prices to rise again in a matter of months. Also, as far as she can tell, no stations have pulled their E85 pumps or switched them to gasoline or other fuels.