CHICAGO -- Three fuel retailers are sitting together in jail. “What are you in for?” one asked the others.
“I priced lower than everybody else, every day,” said one. The charge: below-cost selling.
“I priced higher than everybody else,” said another. The charge: price gouging.
“I priced exactly like everybody else,” said a third. The charge: collusion.
While funny, the joke, shared by Ron Sabia, former president of Gulf Oil, holds an element of truth: the tough pricing position that fuel retailers inhabit in the market.
“In bit of a sense, you’re the tail of the dog—reacting to changes in the market,” said Sabia, speaking on a panel at the 2017 NACS Show on fuel-price causes and consequences. “You have a limited ability to adjust your price.”
First, there’s little wiggle room. Consider that distribution and marketing average about 27 cents of the price of a gallon of gasoline, according to the Energy Information Administration. After taking out the costs of moving fuel from the refinery to the terminal, wholesaler margins and credit-card costs, retailers must find a profit in the scraps.
Meanwhile, regulators are not shy to confront any retailer whom they believe is taking more than their fair share of profit. Case in point: the aggressive prosecution of retailers for price gouging by the state attorneys general of Texas and Florida after hurricanes Harvey and Irma.
Meanwhile the biggest piece of that gasoline gallon’s price—crude oil—has hovered within a small range for about the past year.
“Prices for oil have been remarkably steady through 2017 and 2016,” said Sabia’s fellow panelist, Denton Cinquegrana, chief oil analyst for Oil Price Information Service, Gaithersburg, Md. “You don’t have a very wide range this year and I don’t think it will get much wider. And it’s not going to get much wider next year.”
He pointed to forecasts by some investment banks of crude prices keeping within the $45- to $55-per-barrel range. Factors behind this stability include growing oil production in the United States—this country is producing about 1 million barrels per day more of oil today than at the same time last year. And even the production cuts by the Organization of the Petroleum Exporting Countries (OPEC) have failed to erode the “huge oversupply of crude oil,” said Cinquegrana. Meanwhile, U.S. inventories of oil are about 60 million barrels above the five-year average.
Factors that typically trigger price spikes, such as geopolitical conflicts, are also relatively controlled. Despite the Trump administration’s intention to decertifiy the nuclear deal with Iran, for example, European countries have not followed suit. Fighting in Northern Iraq has not had much effect on oil prices, either. And should war break out with North Korea, the biggest impact would be on demand, since South Korea is a growing consumer of oil.
Also providing a heavy lid on price spikes is growing U.S. production, particularly in the shale-oil regions of the country. This extends to finished product; U.S. refiners are setting their own records. “Refineries are running strong, and they have the motivation to run. The margins are there right now for refiners to produce as much gasoline and diesel as they can,” said Cinquegrana.
“Shale’s kind of a game changer,” he said. “We’ve been insulated from these geopolitical supply shocks. If a country goes offline, the United States has been there to pick up the pieces.”