Paradox at the Pump: How do gas stations decide what to charge per gallon?

JACKSON HOLE, WYO – Retail gasoline prices are perhaps the most recognizable price point in American commerce. It stands to reason given that most American households spend about 5% of their annual budget on fuel ($2,450 average in 2017), combined with the fact that the going rate per gallon is prominently displayed at virtually every convenience store/gas station in the country.

At the same time, ever-fluctuating gas prices are among the least understood in the country. They appear to ride and fall with no tether to reason, but influenced by the calendar, the weather, and demand.

And in Wyoming, we always seem to pay a premium for the same stuff they pump in Texas. So why are we paying so much more?

With the price of crude oil plummeting and, correspondingly, national prices at the pump falling as well, why isn’t Wyoming seeing much relief when we go to fill up?

It’s an age-old mystery. How do gas stations decide what to charge? Beyond that, there are other related questions but we’ll stick with the basic premise: What factors influence fuel prices and, in particular, where does Wyoming and Teton County fall in the curve?

Fuel retailers follow the trading price of crude fairly closely. Their prices are also influenced by several other factors. Many C-stores with fueling stations attached can also afford to offer lower gas prices, hoping to make their profit on snacks and beverages. (Mark Koellmann)

Tied to crude

“So great that oil prices are falling (thank you President T),” President Donald Trump tweeted over Thanksgiving weekend.

With crude oil currently trading at about $51 a barrel, what does that mean for American motorists? Shouldn’t we be seeing lower prices posted at the local gas station?

Gas prices are influenced mainly by the price of crude but it’s not the only factor. Not long ago, about two-thirds of the cost of gas at the pump is determined by crude oil prices. Today, that percentage is more like 50%. Still, the price of crude at any given moment in time rules the day.

Let’s do some back-of-the-napkin quick math.

Given there are 42 gallons in a barrel, retail prices ultimately move approximately 2.4 cents per gallon for every $1 change in the price of a barrel of crude oil, according to NACS. As crude changes, so does the tote board at your local Maverik.

But there is more to it, crudely speaking, than OPEC. The rest of the influences in retail gas prices include a combination of taxes, refining, distribution and marketing.

Formulating the price of a gallon

A lot goes into the price per gallon you are paying at any given gas station. (Gabriel Cote)

Let’s start with taxes. Wyoming is kind of middle-of-the road as far as how much it tacks on to a gallon of gas. At 24 cents a gallon, the Cowboy State actually compares favorably with neighbors Idaho (33¢), Montana (28¢), Utah (29¢), South Dakota (30¢), North Dakota (23¢), and Colorado (22¢). At least we’re not Pennsylvania (58¢ on gas, 75¢ on diesel).

So, we can say Wyoming fuel prices are not terribly influenced by taxes.

What about refining? That’s a tough one to calculate. Let’s assume for the sake of simplicity that all fuel in Wyoming is subject to the same amount and cost of refining than fuel shipped to other states.

That leaves distribution and marketing—and there is where majority of ‘hidden costs’ enter the equation.

Wyoming is a long way from the refineries in the Gulf Coast.

From platform to pump: The gas journey

Oil producers (whether offshore drilling, imports, or domestic shale oil extraction, for example) ship crude through pipelines, ships, rail and trucks to refineries. From there, refined gas and oil products make their way to large tank farms known as ‘racks.’ Downstream, this gasoline and diesel is transported by means of pipelines, rails, ships and trucks to distributors (known in the industry as ‘oil jobbers’), who then put it in trucks and bring it to retailers.

Distributor may be branded (Exxon, Chevron, Shell, etc.) or they may be unbranded. Branded retailers often pay a premium for fuel in exchange for marketing support, imaging and other benefits. Branded retailers typically have the least choice in how they obtain fuel, or at what price.

As in the case of Shervin’s Independent Oil, motorists will probably note the station sells fuel at considerably more than large volume competitors at Maverik and Smiths, for example. This price difference is largely due to the business being tied to the Sinclair brand.

For unbranded fuel, it gets really simple once in the hands of the distributor. No matter who owns a particular gas station, they all get their fuel from the same place. Excepting for octane ratings, it’s the same gas everywhere in the region—just different prices.

Still, states far from the ‘source’ of fuel pay a premium to get it.

Marketing and demand

Where does gas cost the most/least, by state? (GasBuddy)

The remaining factors in retail fuel prices are difficult to assess. These cost influencers rarely show up on a balance sheet anywhere and for that reason seem more nebulous than any part of the price formula.

In fact, demand may account for a majority of the reason you pay more or less at the pump, according to one industry analyst.

Scott Oliver, a chemical engineer at Chevron, begs to differ that the price per gallon of fuel is much influenced at all by the cost of producing it.

“Customers set the prices of gasoline,” Oliver contends. “There’s always a misconception that the oil companies control gas prices, but that isn’t true. Oil companies are price-takers, not price-makers. Many variables affect the price of gasoline, but one of the largest factors is how much customers are willing to pay.”

Gas hotspots across the country. No, this is not a map of Taco Bell locations. (GasBuddy)

And now we may begin to understand why Wyoming gas prices remain higher than the national average right now and, even as retail prices are falling nationwide, they aren’t here.

The national average price of a gallon of gas is currently $2.51. In Wyoming, it’s $2.85. To refresh, taxes matter. States with high fuel excise taxes—like Pennsylvania, Washington, California, New York— are trending above the national average.

Location matters. Gas is dirt cheap in Mississippi, Louisiana, Texas, and Oklahoma. In all nine western states, motorists are paying more to fill up than most Americans.

Demand is the key

Lowest gas in Wyoming. (GasBuddy)
Lowest gas in Jackson. (GasBuddy)

Finally, demand is key. In big western states like Wyoming, Montana, and Nevada we drive a lot. We have to. And we also pay for that driving.

Knowing many of us are running 50-mile roundtrip commutes to work five days a week and humping 200-300 miles more on the weekend to get the kiddos to that hockey game, retailers are doing a bit of price gouging because they can.

Want proof?

More of us are driving more miles than ever before. To a gas station owner, this looks like a frenzied mob waving fistfuls of cash waiting to get in the Walmart at midnight on Black Friday. Said gas station owner gets out his ladder, climbs up to the price board and adjusts accordingly.

Wyoming gas by county. (GasBuddy)

Just for comparison’s sake, let’s look at crude oil prices as compared to the price of a gallon of gas in Wyoming.

Think you are paying more for a gallon of gas than you were this time last year? You are. But why?

With crude oil at $50.42 a barrel on Nov. 24, 2018, gas averaged $2.84 a gallon in Wyoming. Last year, on Nov. 24, 2017, crude was about the same as it is today, even a bit higher—$58.95 a barrel—yet the average price at the pump was $2.48/gallon. Nearly 40 cents cheaper!

Go back further to Nov. 24, 2016. Crude was trading at $46.06 a barrel and gas in Wyoming was $2.00 on average.

Hmm, something’s wrong here. The gas formula isn’t exactly predictable math.

Teton County factor

Finally, there’s the Teton County factor. Consumers in one of the richest counties in the country are used to paying more for just about everything, including fuel.

According to GasBuddy, Teton County leads the way right now in pricing (surprise) at $3.12 a gallon. Lincoln is next highest (could it be the Star Valley-to-Jackson commute?) at $3.09. Platte County has the cheapest gas in the state at around $2.70 a gallon.

Ouch! Gas prices in Jackson don’t seem to be coming down with the plummeting price of crude oil. (Buck)

 

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