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GAS stations profit by passing along wholesale price reductions to consumers slowly

Updated:
Wholesale gas prices have dropped nearly 25 percent in recent weeks, but retailers _ with the July 4 holiday in their sights _ have been slow to pass along the savings.

``There is some avarice at work, as there is everywhere in our economy,'' said Peter Beutel, publisher of the newsletter Daily Energy Hedger. ``They figure the consumer is used to the high price.''

Industry watchers expect intense retail competition and steeper price cuts after the July 4 holiday, typically a heavy time for travel.

``I would not be surprised to see gimmicky prices of $1 a gallon in a couple of states,'' said Tom Kloza, director of Oil Pricing Information Service, a Lakewood, N.J., publisher of oil industry data. ``Retail prices have a lot of catching up to do.''

The average retail price for a gallon of regular unleaded gas is around $1.45 nationwide, down from the year's high of $1.66 on May 14, according to federal Energy Department statistics.

During the same period, wholesale prices on New York Harbor's spot market fell 23 percent, from 89.6 cents a gallon to 68.7 cents.

``Prices go down a lot slower than they go up,'' said Mike Edgar, manager of a Conoco station in Denver. His station was selling regular unleaded for $1.69 a gallon at the end of this week, 8 cents above the regional average.

Wholesale and retail gasoline prices soared this spring on fears there wouldn't be enough to meet peak summer demand of about 378 million gallons a day. U.S. and foreign refiners cranked up production to profit from the price spike, and in doing so, flooded the market, driving prices back down.

While service stations and motorists will be benefiting from lower wholesale prices, the good times are mellowing for refiners, whose margins on gasoline have all but disappeared since May, when wholesale prices passed $1 a gallon.

``What you're witnessing now is the real reason why no new refineries are built,'' said John Kilduff, an analyst at Fimat USA in New York.

Along with profit-taking, tight refining capacity partly explains why retailers are cautious about lowering prices rapidly, analysts say.

Kilduff said retailers know that an unplanned refinery shutdown here or a distribution bottleneck there could easily disrupt the delicately balanced supply chain and cause wholesale prices to shoot up.

For now, gasoline inventories are above 220 million barrels, 12 percent more than a year ago.

At the Conoco station in Denver, Edgar said he keeps close tabs on his competition's prices.

``We follow the neighborhood,'' he said.

Companies with both refining and marketing, such as Conoco, are less vulnerable to the wholesale-retail price swings because they can make up losses in one part of the business with profits in another. Analysts say these companies typically keep their prices up as long as competitive markets allow.

Independent retailers, however, are more exposed to changes in wholesale costs. They raise prices sooner to protect their profit margins as wholesale prices rise. When wholesale supplies get cheaper, they're first to cut pump prices to attract penny-conscious consumers, analysts say.

When wholesale costs were rising, retailers sought to dodge shrinking profits by hiking prices as fast as competition would allow, said Paul Brochu, general manager of Valero Corp.'s refinery in Paulsboro, N.J.

``They were taking it on the chin,'' Brochu said. ``Now they'll wanna capture as much of that increasing margin as they possibly can.''

John Felmy, chief economist at the American Petroleum Institute, an industry trade association, offered another explanation for why prices at the pump lag behind wholesale markets.

``It physically takes time for (less expensive) product to get through the pipelines, terminals and, eventually, to the gas stations,'' he said.

Consumers, meanwhile, are glad to see prices headed down.

Millie Unertl, 83, of Wausau, Wis., paid $1.45 per gallon to fill her Ford Tempo.

``It would seem to me that the price would go up for the Fourth of July instead of coming down,'' she said.

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