Price Supplants Convenience

DTN talks crude correction, retail tipping point, ethanol's affect on food prices

OMAHA, Neb. -- A crude oil price "correction" could be in the making by the third or fourth quarter. Meantime, downstream at retail, consumers are indicating that the price of gasoline has supplanted convenience as their top retail buying priority, as many continue to identify ways to insulate themselves from soaring fuel costs—by hook or by crook.These were among conclusions presented during "Myths, Misperceptions & Facts," an online Webinar sponsored by DTN Refined Fuels.Presenters included Brian Milne, editor of refined fuels for Omaha, Neb.-based DTN; Todd Neeley, staff reporter [image-nocss] for DTN; and Jeff Lenard, vice president of communications for the National Association of Convenience Stores (NACS).

Milne said that China's gross domestic product (GDP), growing at a healthy 7% to 8% clip, is expected to be a prevailing reason why global energy demand will remain high, and thus keep the price of crude oil on a steady to upward trend.

Milne called it an "insatiable desire" for motor fuel in China and India—a desire that's been aided by help from both nations' governments, which have taken an active role to foster additional production avenues—in China particularly to for chemical production. Milne said the Summer Olympics, to be held in Beijing, will continue to see aggressive demand for fuel in China.

Asked if at some point he anticipates a correction in crude pricing (now trading at $115 a barrel), Milne said a correction could come during the third or fourth quarters, when crude prices could settle back in the $80 range. A strong link between a weakened U.S. dollar and crude prices continues to keep prices high."Once there is a sense that this link is weakening is when crude prices could fall below $100 barrel. I think we still have more pricing upside [ahead], even though domestic gasoline demand is expected to be lower this summer," he said.Focusing on retail activity, Lenard said U.S. consumers that once cited convenience as the top reason for frequenting one retail location over another, now say that gasoline prices are the top motivator. He said about 73% of consumers polled by NACS indicate that fuel prices trump convenience in determining what retail facilities they patronize."We found that 29% of consumers will drive out of their way to save 3 cents a gallon on fuel," he said. "People feel good about the cost savings [they are able to achieve]." It's an emotional topic, he said, but one that often is carried out in vain as many might save a few cents on fuels, but increase their miles driven in the process.

Depending on the geographic markets, consumers are establishing a "tipping point" on the cost of fuel. When gasoline prices reach $3.71 a gallon, explained Lenard, is when the majority are expected to alter their fuel-buying behavior. He called the median tipping point $3.25 gallon—the point when a smaller number of consumers have already begun to change their buying behavior.

To circumvent the price stick shock, consumers are doing everything from driving around looking for the best deal, driving off without paying for fuel and even siphoning fuel from underground storage tanks. Lenard said that more consumers are "bundling" trips to the store. For example, he said consumers that would not perhaps buy bulk items at c-stores, such as cases of beer or soda, are beginning to do it with more regularity as they fill up their tank.

As for retailers, Lenard said that they must continue to find ways to flourish amid an operating environment that sees continued lower fuel margins, often averaging 1 to 2 cents per gallon. "Retail is changing, as the largest oil companies and even mid-sized companies are divesting retail locations and getting out of the business," he said.

One trend will continue to see more single-store operators dominate the retail landscape as Big Oil and even mid-size refiner/marketers continue to divest "low-performing" stores. Lenard said this provides a golden opportunity for "new Americans who are making a go of it in this business" to succeed in convenience retailing.As this new breed settles in, Lenard said, it will be incumbent on them to place an emphasis on in-store sales and not fuel—otherwise "they won't be in business very long."

Neeley said that blaming the soaring cost of food prices on increased ethanol production—due to the increased use of corn—is shortsighted, as it's just one of several factors in the mix—perhaps a minor one. "Food prices are rising for a number of reasons and corn prices are just one," said Neeley.Labor and transportation are major reasons for the increased food marketing bill—particularly labor, which at 39% is the highest and most costly component of retail food, according to the USDA.

Neeley said that as more people demand further-processed and value-added foods, labor costs will increase even more—as will packaging, which contributes 8% to retail food costs. Transportation (4%) and energy (3.5%) also have an impact on retail food costs.

Neeley said that it will be some time before corn used to make ethanol will be supplanted by cellulosic technology (using biofuels to reduce greenhouse emissions), which would exert less pressure on corn dependency going forward. He also said he does not expect the 51-cent federal blender's credit for ethanol producers to go away any time soon—particularly as corn prices reach new levels and ethanol producers will count on this credit more than ever.

On the crude oil front, Milne added to further comments, when asked if he envision a "worse-case scenario" for crude oil prices in the near future. Milne said that there would have to be a preponderance of negative outcomes all occurring at once for $115 crude prices to move significantly higher—to $150 or even $200 barrel levels.

He said U.S. space capacity is tight. Russian production has fallen off and Prudhoe Bay production is also down. "We are at $115 a barrel now, and could envision reaching the mid-$120 range, but that would have to be based on bad news coming all at once."

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