The Mechanics of Gasoline Prices

Retailer, wholesaler address increasing costs, credit cards and oil speculation

MECHANICSVILLE, Va. -- The current gasoline-price atmosphere is as frustrating for retailers as it is for consumers, but upon contemplating how it ultimately affects the bottom line, Dave McComas of Fas Mart is quick to turn his attention to credit-card fees. "Over the last two years, credit-card payments in our company have gone from 30% of sales to over 70% of sales." McComas, president and CEO of Mechanicsville, Va.-based GPM Investments LLC, owner of the Fas Mart and Shore Stop chains, answered questions from reporters and readers of the Richmond Times Dispatch during an online chat Wednesday.[image-nocss]

"Customer's disposable income is down due to the high gas prices," he said, noting that as a result, more consumers are paying for gasoline with credit cards. "Our credit-card transaction fees have more than doubled. In fact, the fees paid by the convenience-store industry last year exceed the profit of the entire industry. So the credit-card companies are making more profit on retail gasoline than the retailers."

McComas was joined by John Zehler Jr., president of Virginia Fuels Inc., a Mechanicsville-based petroleum wholesaler, in answering readers' questions in the 45-minute chat.

"Why is there at times so much disparity in gas prices from geographic locations, including those within the same communities?" asked one reader. "The difference can be 10 cents or more."

"The volatility of the wholesale cost of fuel can change as much as 20 cents per gallon, per day," said McComas. "When you see these large differences, one retailer has old product in the ground and the other retailer has bought the more expense product."

When asked what the future holds for gasoline prices, both McComas and Zehler were hesitant to predict too far in the future, but both expect increases to continue.

"My crystal ball generally is only within a 10 day window," said Zehler, "[but] when I examine the futures market into 2010, I see little or no relief in sight for prices within the next year."

McComas agreed, saying, "I believe that in the short term, we will continue to see rising prices, even with the build in inventories this week."

The price increases have affected gasoline volumes at McComas' stores, but he does expect volume to bounce back. "[Consumers] are changing their habits," he said, "but if prices hold in the $4 range, the market will adjust as it has every time we've had a substantial price increase in fuel. People will go back to their old habits."

Both industry experts saved their most forceful comments when talk turned to oil speculators.

"There's clearly a premium in the market due to financial speculators," McComas said. "If you look over the last 18 months, oil has gone from $50 a barrel to $150 a barrel, and that increase cannot possibly be supply and demand."

Zehler, however, offered some support for oil speculators, noting that "the futures market and the word 'speculation' have come under excessive criticism."

"I contend that the fundamentals of the market need the speculation community in an effort going forward to maintain the relationship between supply and demand. Without this speculation, the limited players within the physical market may have the ability to manipulate prices," he said. "Speculation should never be confused with manipulation.… It anticipates the direction of prices based on supply and demand."

He added, "Maybe we should even applaud the futures market in that higher prices generate additional product, alternative energy forms, conservation and a host of other avenues that may successfully propel us through this coming crisis. The key question remains, 'How much demand destruction will be created by higher prices, and how much additional supply will be created by these higher prices?'."

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