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Thread: If gasoline has such a low profit margin, then why the huge difference in prices?

  1. #46
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    Gas prices are set by the market leader - around here its usually SA. SA buys the most gas and therefore they see the prices from the refinery more quickly than everyone else. The independents and small operations HAVE TO do what SA does, at least within a penny or two or they will be out of business very quickly. Sometimes you see one of them trying to undercut SA by a penny or two but it is usually very short-lived -the reason, they have a very low margin, they don't make much money from the gas sales and they need to be inline with SA or go out of business. If the price goes up all they can do is hope that it does so when they have a full tank themselves so they can reap a temporary increase in profit. When the price drops they can hope that they have a nearly empty tank so they can fill up with low priced gas. This isn't rocket science. The stations themselves are scraping by. Ever notice how many are out of business and converted to a Caribou Coffee location, a convenience store, or sitting empty? The profits are being made at the corporate level.

    There are exception - a gas station in proximity to a car rental return at an airport for example, or in a downtown city location, or sometimes one off by themselves in the middle of no-where. Places where people are forced to pay extra due to circumstances
    Last edited by Pat Barry; 08-05-2014 at 9:40 AM.

  2. Quote Originally Posted by Rich Engelhardt View Post
    I'm not at all against them making a profit - - what galls me to no end though is all the lies and half truths!

    On one hand, they cry about slim profit margins and claim the profit is only a few pennies a gallon.
    Then you see the price fluctuations and just shake your head.

    BP, on one corner of an intersection will stick up a price of $3.79 a gallon. Sheets on the opposite corner will post a price of $3.39 a gallon. Circle K down the street will post a price of $3.59 a gallon.
    An hour later, each one is $3.59 a gallon.
    Then, two days later each one is at $3.79 a gallon.

    Meanwhile, a couple more miles away, the Get Go station is at $3.22 a gallon!

    If - and it's a huge if - it's true there only pennies of profit on a gallon of gas, then how in the world can the prices fluctuate by dimes and not pennies?
    There's a number of factors that can be at play:

    Is the station corporate, franchise, or independent?
    If they're corporate, are they near enough to a company owned refinery and/or fuel distribution network to cut out one or both of those middle men?
    If not, do they buy their fuel on contract?
    If not, do they hedge futures contracts? If they do, are they seasonally managed? Short term (3-12 months), medium term (12-60 months), or long term (60 months-20 years)?
    Are their futures derivatives or for delivery?
    If they're franchise, do their overseers have binding guidelines on pricing?
    Is it a convenience store or a service station? If it's the former, they may actually be pricing the fuel at a loss of up to 15 cents per gallon to draw people in to buy big gulps and doughnuts, things which routinely have profit margins of 300-500%.

    Of course there are places that price according to location. Someone mentioned a station on a remote stretch of highway that priced much higher than a place a bit into the town. I personally consider that to be unethical, but it's not illegal. Making it so would require a medicine worse than the illness.

    But sometimes they do so because people want them to. If they didn't, they wouldn't shop there. I was in a large city one time and pulled off a 4 lane parkway into a gas station. I looked across the road and saw another station had prices 26 cents higher per gallon. I asked the clerk inside why it was packed and hardly anybody was filling up where I was. She looked at me funny and replied, "'Cause this is the ghetto. White folks don't stop here." I grew up just outside a town of 400 people; little did I know.

    If there were monopolies jacking up prices artificially because people don't have alternatives, that'd be one thing. But the world's largest oil company in the private sector, Exxon-Mobil, only has around ~3% of global crude production. ConocoPhillips is the largest refiner in the United States with 12% of capacity, while Valero is the largest private sector refiner in the world with a bit less than 4% of global capacity. Compare those figures with makers of autos, cell phones, computer chips, tennis shoes, etc. and they are dwarfed in terms of their miniscule percentages of overall market share in their respective industries.

    Quote Originally Posted by David Weaver View Post
    That is *exactly* what I was referring to when I said I'd complain about it when I thought I could make it and distribute it more cheaply. There's not much low hanging fruit out there, and what comes out doesn't look like the stuff that gets shot on the ground in the beverly hillbillies opening theme. Around here, it looks like water with a little bit of oil in it.
    I worked with a guy that bought a lease off another company that was going to abandon it. It had two producing wells and a disposal well. The first producer made 20 barrels of oil per day out of 2,000 barrels of fluid. The second made 5 barrels of oil out of 1,500 barrels of fluid. He described them as, "Nice little wells. Keeps me with some pocket money."
    Last edited by Jackson Phillips; 08-05-2014 at 9:58 AM.

  3. #48
    that's pretty good, I'd like to have a couple of wells making me 25 barrels a day! I wonder how much buying the lease cost him.

    Our PBS here had a special on a guy north of me in the woods who had an old setup of producing wells going, and I guess he's been running them for decades and decades - maybe he rotates, not sure, but his setup was as old as he is, I'd imagine. He said he gets 3 to 4 barrels a day in general, and his setup requires a lot of tending/walking to check and work it. There must've been a lot of lean years for him. He was checking the quality of what was coming out of the ground by tasting it. I don't know if that's common.

  4. If I remember right, I think he got the lease for a couple thousand dollars. But that was back in the mid 90s when oil was $10 a barrel. It sounds like an amazing deal now, but the wells don't produce enough natural gas to run their own pumping units, so the pumpjacks have to have electric motors. The electric bill used to run $5000-6000 per month. So after paying royalties to the landowner and maintenance, he was only making a couple hundred bucks a month back then. Now I imagine they're quite the little money makers.

    Your local guy is of a passing breed. Most people now don't want to do the several hours of hard manual labor (and I mean hard) seven days a week, 365 days a year that a group of wells take and the younger operators who have graduated with MBAs rather than geology or engineering degrees don't want to pay for the labor. Automated systems just aren't the same; they can keep a piece of equipment from self-destructing when something goes wrong, but can't keep it running. In general wells spend a lot more time down now than they used to. To get optimal production, they have to run constantly year in, year out. Not doing so creates uneven pressure gradients that can cause all sorts of problems. Also, the first thing out of a rock formation is the water. When a well goes down it only takes a few days, or even just a few hours, for it to water out if there's quite a bit of water in the formation. Then it takes several days to several weeks to get the oil cut back.

    Tasting the water can tell you a couple things. First, if it's not as salty as it should be, then there's a hole in the casing somewhere and you're pulling in and pumping out a lot of fresh, shallow groundwater that's diluting what should be going into the well bore (and possibly pushing oil and saltwater into the fresh water table). The second thing it can tell you is if you're pumping the well too hard. If there's an increase in the amount of mineral in the water (usually lime, gypsum, or iron), you're drawing a vacuum on the producing formation. That draws fine particulates through the perforations in the casing, possibly plugging them up (meaning a very expensive workover job pumping acid down the hole to break up the deposits), or worse, collapsing the formation around the well bore (ruining the well permanently). It's not nearly as common as it used to be. Most people wouldn't realize it, but I'd bet that guy is an artist at what he does.

  5. #50
    It's hard to tell from PBS, though they try to get the reports factual, they like to focus on the people and make everything seem like art leaving it a bit cloudy about how much of a genius and how innovative a lot of those types of guys are. The guy was dirty, and he said he had interest in getting people to work for him, but nobody sticks around (probably because he couldn't afford to pay anyone else to do the kind of work he did for the kind of pay he was getting). I recall a lot of hard steel lines set up to transfer power from one place to another. We only have gas wells in this area, so none of it looked familiar to me other than it was what my father would've called "a bunch of contraptions" and what was coming up out of it looked like water and not oil.

    I hope the guy was around long enough to make a few bucks, it was a while ago I saw that special.

  6. #51
    pop quiz:

    Why is it that no matter what the price of gas is, the difference in price between octanes is always around 10 cents?

    Back in 2008 when some (I digress) shot gas up to $4.30 a gallon, mid-grade was $4.40, and premium was $4.55...

    A little later in 2008 when gas shot gas back down to 98c a gallon (it got that low here), mid grade was $1.08, premium was $1.18...

    Today, I can get regular at $3.48, midgrade at $3.58, and premium at $3.71... The higher gas goes, the cheaper premium gets (by ratio anyway)

    Does it really only cost $10 a gallon for each 2-steps in octane?
    Last edited by Bruce Page; 08-05-2014 at 5:56 PM.
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  7. #52
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    Quote Originally Posted by Rich Engelhardt View Post
    The three stations a half mile from me is selling 87 octane for $3.55 a gallon.
    Meanwhile, the Get Go station that's 4 miles away is selling 87 octane for $3.19 a gallon when I swipe my "loyalty" (yeah right! ) card and get a $.03 a gallon discount.
    You Get-Go is looking for foot-traffic volume in the store. And volume at the pump. Big margins in the store. Also - at the pump it is an issue of variable v. fixed costs.

    The infrastructure is a fixed cost - concrete, computers, pumps, etc. The marginal cost of the next gallon sold is a different duck. They can structure their bs model to have the store side carry the weight of the entire physical plant, and then the pricing at the pump becomes a very thin margin deal - designed to sell more fountain drinks, Marlboros, and beef jerky.


    OTOH - within 1/2 mile of me are 2 gas stations on Peachtree Street. Yes - THAT Peachtree street, in Atlanta. No other gas station on that road for many miles in either direction - I bet at least 5 miles either way. Their prices are competitive with each other.

    However, off Peachtree, 4 - 5 miles away, are 3 stations staring at each other across an intersection. Their prices are a penny or so different, and all are 25 cents less - maybe more - than the 2 on Peachtree Street.

    Rent on Peachtree is probably staggering. There are no other stations nearby. Gonna run 5 miles for 10 - 15 gallons cheaper? Many of us would. Many people are in a rush and don't.

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  8. I'm not familiar enough with refineries to give you a definitive answer, but I can give you a weird anecdotal one in my area. A number of years ago a couple refineries around where I live developed a perpetual surplus of high octane fuel. It used to be priced at 30-40 cents over 85-87, but with almost all car makers moving away from it, they were producing too much and due to their setups had a lower limit on how much they could reduce output. So the price dropped and dropped until it ended up being 10-20 cents cheaper than regular. People started filling up their cars that were specifically engineered by the auto makers for regular with premium. Uber expensive maintenance arises, frivolous lawsuits ensue, and bam - it ends up 10-20 cents more expensive again.

    I'm not sure what the current situation is with getting the octane rating correct in blends. I would think it would be a lot easier now though with the amount of ethanol that can be mixed, given it's 113 octane, but that's just an uneducated guess.

  9. #54
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    Quote Originally Posted by Jackson Phillips View Post
    People started filling up their cars that were specifically engineered by the auto makers for regular with premium. Uber expensive maintenance arises, frivolous lawsuits ensue, and bam - it ends up 10-20 cents more expensive again.

    I'm not sure what the current situation is with getting the octane rating correct in blends. I would think it would be a lot easier now though with the amount of ethanol that can be mixed, given it's 113 octane, but that's just an uneducated guess.
    A car designed for regular should have zero problems with premium gas... I cannot fathom how using premium (which is only a few octane higher than regular) would cause issues.

    Now, if you're talking about the 113 octane as "premium", then yes, race gas has the potential to cause issues... but I wouldn't call race gas "premium".
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  10. #55
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    Quote Originally Posted by Dan Hintz View Post
    A car designed for regular should have zero problems with premium gas... I cannot fathom how using premium (which is only a few octane higher than regular) would cause issues.

    Now, if you're talking about the 113 octane as "premium", then yes, race gas has the potential to cause issues... but I wouldn't call race gas "premium".
    I read it as Jackson saying that ethanol is 113 octane. I don't know that for a fact but I believe that piston engines burning ethanol can run at higher compression without 'pinging'. There was interest in this in the '70s when prices and supplies of petroleum were unstable but then petroleum prices dropped and interest in optimizing engines for ethanol dropped too.
    Last edited by Curt Harms; 08-06-2014 at 9:16 AM.

  11. You should have been on legal teams of the companies selling the high octane fuel as premium. It wasn't 113, but around 100 +/- a couple.

  12. #57
    Higher octane gas vs low octane is harder to ignite, and burns slower, which is why it prevents pinging. Because high octane fuel harder to ignite and burns slower, it's less efficient, which equates to less power and gas mileage for a given amount of fuel. This is about the only 'detrimental' effect of using premium if you don't need to. High compression/HP engines (turbocharged for example) can obtain substantially more power using premium, which more than overcomes any negatives. But for typical commuting use, paying for premium is likely a waste of money.

    Engines can run great on pure alcohol with substantial modifications, but even so, you can't start an engine on pure alcohol.
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  13. #58
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    High octane is the only thing you should be running for high-compression engines, too. My old S2000 was a 13:1 compression ratio (I think the Japanese version was 13.7:1), and while it would run on regular, the timing was retarded to prevent premature detonation (read, loss of HP). On race gas, man that thing would fly!
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  14. #59
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    Gas stations in Iowa were selling mid grade premium gas for less money than regular 87 octane gas because the mid grade premium had ethanol and regular gas is just gasoline. I don't know if that has changed in the past few years.

  15. #60
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    Where I live, it is difficult to find gasoline that hasn't been diluted with alcohol and the product is generally $0.20 or so more expensive. That is due to government policy rather than market forces.

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