Harvey’s Margin Destruction

Gasoline supply is ample, prices are meek

CAMARILLO, Calif. -- The Aug. 25 U.S. average retail price of regular-grade gasoline is $2.3921 per gallon. Two weeks ago, it was $2.3971, so it fell half of one penny, according to the most recent Lundberg Survey of approximately 2,500 U.S. gas stations.

Also since Aug. 11, the weighted (all-classes) wholesale price rose 5.10 cents per gallon (CPG), mostly in the past couple of days, costing retailers 5.65 cents in margin. Margin on Aug. 25 sits at a narrow 11.38 CPG for regular grade, the lowest in a whole year; it was 10.34 CPG on Aug. 19, 2016.

Not limited to areas hit by Tropical Storm Harvey, wholesale-price hikes were all around the country, including the West Coast.

In Houston, the average retail price of regular-grade gasoline is $2.1035 per gallon, down 1.86 cents since Aug. 11. The weighted wholesale price is up 3.81 cents over the two weeks, putting the Aug. 25 margin at a pitiful 4.05 CPG. Clearly, there's pressure to get well via a street-price hike, if wholesale prices do not quickly retreat.

But in Houston and elsewhere, there is also a fear of price-gouging accusations, as petroleum retailers may avoid or delay hiking price, even straightforward pass-throughs of wholesale-buying price hikes. History has shown that for some, a way to avoid being called “unconscionable” by officials is to put a “closed” sign on the door and pumps. It may not be easy to recover lost margin quickly under such conditions.

Among markets where prices increased during the two weeks, Seattle and Portland, Ore., stand out with the biggest hikes, both a dime. Margins in both of them on Aug. 25 sit more favorably than elsewhere at about 30 CPG.

Fortunately, most of the country’s refining capacity remains up and running. Gasoline stocks and output are comfortable, enough to more than satisfy demand. A dramatic gasoline-price spike so far seems unlikely to occur. Demand destruction is taking place in hardest-hit areas, enhancing the supply balance. If imbalance should ensue, volumes of exports can stay home instead, to satisfy domestic demand. The same goes for crude oil.

Crude-oil prices have exhibited just modest changes in this period, as they have during most of the past two years. If they do not jump or crash soon, and if damage from Harvey does not become far more severe, then short term, the U.S. average pump price is more likely to stand pat or drop a little than to rise, even with a bit of retail-margin recovery built in.

Camarillo, Calif.-based Lundberg Survey Inc. is an independent market research company specializing in the U.S. petroleum marketing and related industries. Click here for previous Lundberg Survey reports in CSP Daily News.

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