Who sets gasoline prices? Not oil companies

Sep 15, 2005 02:00 AM

by John Yantis

The cost of gasoline is determined by oil futures traders who shout prices at each other in the pits of the New York Mercantile Exchange during the day and quietly make deals electronically overnight.
Michael Burdette calls it a nearly 24-hour-a-day automated auction where prices can rapidly change as the trading floor hums on every piece of energy data it can get its hands on.

"At all times, there’s a continual action going on," said Burdette, a senior analyst with Energy Information Administration, a division of US Department of Energy.
"This is one reason why I try to hammer home the point that everybody thinks the oil companies raise gasoline prices. They don’t set gasoline prices. The market sets gasoline prices, and it is every bit as much a matter of bidders driving the price up that they’re willing to pay because they’re competing to buy scarce product as it is sellers holding back and raising the price they want to get. The bottom line is in any kind of auction, it’s kind of going both ways."

Everybody from oil producers and refiners to big consumers and speculators get in the action.
"Sellers can be refiners and importers who are bringing in product or producing product and have it available for sale, and on the buying side, you’ve got traders and marketers who want to purchase product so they can turn around and sell it to somebody else," Burdette said. "The speculating folks that are also in the market can be in on either the buying or selling side because they’re constantly either taking long or short positions simply depending on whether they think the price is going to go up or down."

It’s a process that fascinates and frustrates David Cowley of AAA Arizona.
"I’ve had guys tell me they have a hard time justifying more than $ 4 or $ 5 to get a barrel of crude out of the ground," he said. "We’re paying $ 63. How do you figure? I’ve always wanted to see if I could come up with $ 65, even including a $ 15 terrorism fee that I include in everything we think about. I just struggle to get to our current price and an awful lot of it is just nothing more than speculation. At some point, you just have to say this $ 10 or $ 12 is nothing but pure profit to somebody whose never going to take possession of the oil. They are just making money."

Speculators can be anyone who has the money to buy futures contracts or options in them, Burdette said. "Oil really isn’t any different than wheat, corn, gold or platinum.... They’re all traded that way."
Oil changes hands a number of times from its purchase to the gas tank and the price normally increases with each sale. About 70 % of the gasoline in the East Valley comes from California and 30 % from Texas. Most of the oil that California’s 13 refineries use to make the Valley’s gas is produced in California and Alaska. About 30 % of it is foreign oil that is shipped from as far away as Australia and as close as Canada.

Gasoline the Valley gets from Texas is refined in New Mexico and Texas using oilmainly from domestic fields. A small percentage comes from oil pumped in the Middle East and shipped to the Gulf Coast for refining.
Big oil companies, under contract with petroleum-rich countries, discover and drill for crude. The oil is shipped by pipeline to a coastal area where it is stored. The companies, either using their own or leased ships, load the oil at an off-shore platform and transport it to refineries in the United States.

Oil is unloaded and run through a pipeline to an offshore port where it is pumped onto land and stored. All of the stages are costs reflected in the amount a refiner is willing to pay for a barrel of crude. Currently about a third of the price that you pay at the pump goes to the refiner.
Once refined, gas is shipped by a pipeline to a marketing and distribution terminal in Phoenix where the terminal, or "rack" price is determined by the truckload. Additives that can cost consumers 5 cents to 7 cents a gallon are put in by oil companies that promise better engine performance.

A truck hauls it to a gas station that pays a wholesale price. It is put in underground storage tanks for use by motorists.
In Arizona, state and federal taxes add 37 cents per gallon. The latest figures show the retailer get about 26 cents a gallon.

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