Opinion: Why 2017 May End With Below-$2 Gas Prices

Joe Petrowski, Mercantor Partners/Yesway

Low gas prices

FRAMINGHAM, Mass. -- The national average retail price for gasoline in late July was around $2.28 per gallon. About 60% of stations were selling gasoline at $2.25 or below. The national low was $2.23 in June and the high was $2.42 in March.

Despite some analysts seeing a rebound to $2.50 or higher, the national average prices for the balance of the year should average $2.20 or less. Here’s why ...

My projections

Crude oil barrels

I expect U.S. crude prices to average $35 per barrel for West Texas Intermediate, which is $10 less than today and will be driven by abundant supply. Refining margins will come under pressure with gas cracks averaging $10 per barrel, putting wholesale gasoline under $1.10 per gallon vs. $1.55 in late July.

The laid-in price to the station today is $1.60 per gallon. State and federal taxes are averaging 49 cents per gallon (CPG), retail margin is at 19 CPG, wholesale and transport is at 10 CPG, the terminal price is at $1.50 per gallon and the posted street price is at $2.28.

For the balance of the year, here are my projections for these metrics:

  • State and federal taxes: 49 CPG
  • Retail margin: 17 CPG
  • Wholesale and transport margin: 9 CPG
  • Wholesale price: $1.40
  • Posted street price: $2.15

As usual, California, New York and high-tax states will pull the national average up, but there is a good chance we will have pockets under $2 per gallon and a majority of stations under $2.20.

My rationale

Pumping gas

Besides abundant supply, the other factors putting pressure on retail gasoline prices are:

  1. The drive for volume.
  2. The drive for profits. The average gasoline retail site currently sells 17,000 gallons per week. Every convenience retailer should know that the repeat customer has a net present value (NPV) of $3,000. A well-structured store makes $3.50 per inside transaction, which overwhelms the $2 per transaction made on fuel.
  3. The drive for RINs. The average retailer last year made $75,000 per site on renewable identification numbers (RINs). While we do not know future RIN values, it does appear values will hold for the balance of the year.
  4. The drive for wholesale volume and transport. Both businesses are the quintessential scale businesses, operating at close to zero marginal cost. In fact, several wholesalers have admitted privately they make more on RINs than in traditional wholesale marketing. There are 3.7 million Class 8 fuel trucks on the road going 139 billion miles per year, or 38,000 miles per truck operating at 88% capacity. (This might explain why there was a decline in new Class 8 purchases last year and there is pricing pressure for new business.)

So while I fully understand “reversion to the mean,” and mean prices for retail gasoline have been $3 per gallon over the past decade, current realities say $2.20 is a better bet, and sub-$2 per gallon is a real possibility.

Joe Petrowski is an adviser to BW Gas & Convenience, dba Yesway, Des Moines, Iowa, a c-store unit of Brookwood Financial Partners LLC, Beverly, Mass. He is also founder of Mercantor Partners LLC, a private-equity group focused on downstream energy distribution and retail convenience, and former CEO of Cumberland Farms and Gulf Oil.