VOL. 127 | NO. 104 | Monday, May 28, 2012
A story from The Memphis News
On newsstands throughout the city
By Andy Meek
If the political ads along these lines haven’t already started by the time this story is printed, don’t worry. They’ll arrive soon enough.
Somewhere out there, a Republican political strategist is cooking up an ad that hits President Barack Obama over the average price at the gas pump these days – which, while it has fallen in recent weeks, is still a lot higher than when the president took office. At press time, the national average for a gallon of regular gas was $3.72 – up from a little less than $2 when George W. Bush left office.
The price at the pump is a political issue, because it’s also a personal one. Every extra dollar that goes into filling up the gas tank is a dollar less that’s available to consumer for groceries, for luxuries, for eating out – and every other bit of rejuvenation the economy could use right now.
Someone who drives a car with a 14-gallon gas tank and who fills it up once a week is paying about $208 per month solely on gas, at current prices. Shave a dollar off the price per gallon, and that driver could save about $50 a month.
That bit of economics affects almost everything. At the moment, tongues around Memphis are wagging over the high price of local airfare – which, of course, isn’t helped when fuel has an expensive price tag.
A BP spokesman told The Memphis News most convenience store owners make only pennies as a profit margin for every gallon of gas they sell. The real moneymakers are the slushies, the candy, newspapers and other items inside that customers may or may not walk in the door to check out.
When Dunavant Enterprises CEO and president William Dunavant III asked for a show of hands during a presentation he made last year to the Traffic Club of Memphis about whether gas would ever fall back to around $2 a gallon, no hands went up in response to his question.
The economics of fuel also is directly attributable to a big tax break Memphis-area economic development officials recently awarded.
In December, Valero Energy Corp. got a 15-year tax freeze in exchange for spending more than $298 million in investments and upgrades at its Memphis refinery. (The Memphis facility also is the only refinery in Tennessee.)
Fuel is so expensive – and so expensive to refine – that several refiners are shutting down on the East Coast, according to a Valero spokesman who also told The Memphis News that Valero has suspended operations at its own Aruba refinery.
For much of the fourth quarter, the gasoline margin – or, the difference between what refineries pay for crude oil and what they get back for gasoline – was negative. In short, the oil was more expensive than the gasoline.
Valero also happens to be in the retail business, so spokesman Bill Day put it this way: there’s a lot more profit in selling consumers a 32-ounce fountain drink inside a convenience store than there is in selling a gallon of gasoline outside the store.
“When your raw material is more expensive than your finished product, that isn’t a good long-term business model,” he said.
The Memphis Valero refinery, at Interstate 55 and Mallory Avenue, can process 195,000 barrels of oil a day. It also has a direct pipeline to supply tenants at Memphis International Airport.
That refinery, which processes oil into gasoline, diesel, jet fuel and other chemicals, also produces a higher-cost crude than many of its other facilities. It’s a reality that leaves an opening for Valero rivals as well as other Valero facilities to be more competitive on costs than the Memphis refinery.
The company has maintained a refining presence in South Memphis for 70 years. It currently employs 305 people in Memphis, including 252 contract employees.
The Memphis refinery was built in 1941 and expanded several times to get to its present capacity for light, low-sulfur crude oil. It was bought from Premcor in 2005 and primarily processes light and sweet crude oil received through the Capline pipeline.
Stepping back from that, the economics of gas prices aren’t that difficult to fathom. Here’s how it breaks down, according to Jessica Brady, media relations manager for AAA Auto Club South:
Seventy-six percent of the cost of a gallon of gas goes to the cost of crude oil. About 12 percent pays taxes associated with fuel. Refineries take 6 percent, and the remaining 6 percent is split among transportation costs, retailer profits and marketing costs.
“Once you add in transportation costs, retail overhead, and an average of 40 cents per gallon in state and local taxes, you get to the national average of around $3.83 pretty quickly without factoring in much of a profit for the retailer,” Day said.
What that means is how you get to the price at the pump is pretty straightforward. Why that price follows the path it follows, though, is not as straightforward.
“Refineries don’t set the price of gasoline and other fuels,” Day said. “If they did, they would simply factor in their costs, add a profit, and that would be the price. Refineries would always make money. Instead, fuel prices are set in the marketplace, and quite often the price of fuel ends up being less than a refinery’s cost, and that refinery loses money.”
The price of gas cuts both ways. Brady said motorists nationwide on average are paying anywhere from 20 to 30 cents less for a gallon of gas than they were at this time last year. On the other hand, that doesn’t make it feel any better when motorists are still stuck with paying what they have to pay at the moment – a higher price than they’ve historically been accustomed to.
Be that as it may, the U.S. Energy Information Administration’s (EIA) April 2012 Short-Term Energy and Summer Fuels Outlook is forecasting that the monthly average national retail price of regular gasoline during 2012 will peak at $4.01 per gallon in May.
“If this forecast is realized, May prices would reflect the third highest monthly nominal average price on record after July 2008 and June 2008,” according to the EIA. “For the summer as a whole (April through September) prices are forecast to average $3.95 per gallon, which is 6.3 percent higher than last summer’s average of $3.71 per gallon.”
Brady said she thinks, in the short term, prices will continue to drop, on average. But there’s an important caveat – the rate of decrease is going to slow down, too.
It helps that demand is down about 4.2 percent from last year, according to the EIA. Manufacturing in China also has cooled a bit, and Europe has been dealing with a debt crisis for close to two years now.
So, pockets aren’t exactly bulging with cash at the moment.
“Now, there’s two wild cards that have the potential to drive prices back up,” Brady said. “One of them is the rescheduled meeting between members of the UN and Iran to discuss their nuclear efforts and sanctions that have been imposed on the country. If that meeting is amicable, I think we’ll be in the clear, and I think prices will continue to either retreat a bit or stabilize.
“The other wild card that’s out there is hurricane season. If they cause refiners along the Gulf Coast, or anywhere else, to shut down for any period or cause any damage, that can drive prices up as well. But those factors out of the equation, the demand numbers both domestically and internationally are down.”