Pump prices should fall further, but crude's only half the story

NEW YORK -- The headlines say oil prices have fallen 15 percent this year. Gas station receipts tell a different story -- the cost of filling 'er up has slipped from about $35 to $33. Big deal.<br/>

Friday, January 19th 2007, 4:09 pm

By: News On 6

NEW YORK -- The headlines say oil prices have fallen 15 percent this year. Gas station receipts tell a different story -- the cost of filling 'er up has slipped from about $35 to $33. Big deal.

The cost will probably drop further, but drivers shouldn't hope for a big windfall at the pump: there's a lot more that goes into gasoline prices than the current cost of crude oil.

Besides taxes and the costs of refining, distributing and marketing, there are factors such as local competition among gas stations. Just as with other forms of retail, consumers see savings when one retailer lowers its price, and the others scramble to match it.

"If gasoline costs me a dollar a gallon, and my competition down the street is selling it for 89 cents, my customer doesn't care what I paid for it," said Richard Oneslager, president of Balmar Petroleum, which operates 14 gas stations in Colorado.

Crude oil prices have fallen from about $61 to $51 a barrel this year on the New York Mercantile Exchange, but the price of gasoline on the side of the road has declined more slowly. The average price for a gallon of regular is down about 13 cents from $2.33 on Jan. 1 to $2.20 on Friday, a day after crude briefly fell below $50.

A typical car holds 12 to 15 gallons, so if it's filled four times in a month, that's savings of less than $8 in a month â€“ not even enough for that daily cup of coffee.

Pump prices haven't plunged to $2 a gallon yet, which is where they were back in early 2005, when crude oil prices were also around $50 a barrel. The big difference was that, unlike now, crude oil wasn't coming off a record high of $78 a barrel just six months earlier.

Essentially, the recent price drop hasn't completely sunk in on the wholesale level, so gasoline retailers are still paying a lot for their product and won't lower prices until competition forces them to do so.

The Energy Department says the price of crude oil accounts for about half the retail price of gasoline. That means if crude oil is down 15 percent, pump prices should be down almost 8 percent.

But the time it takes for a drop in wholesale prices to fully affect retail prices is around 12 weeks, though most of the drop happens within the first two weeks.

"Retailers aren't making their price decisions on the price of crude oil," said John Eichenberger, vice president of government relations at the National Association of Convenience Stores. Instead, they focus on how much they paid for their current load of gasoline, and how much their supplier is telling them their next load will cost.

"We don't care about anything except what that tank the truck just brought in cost," Oneslager said.

Contrary to what many drivers think, the huge "ExxonMobil" or "Chevron" signs above your local gas stations don't necessarily mean they're run by big oil companies -- a lot of them are franchised. Jeff Sundstrom of AAA estimates that over 80 percent of the nation's gas stations are run by individuals or small to medium-sized businesses.

The average gasoline retailers have to charge 13 cents per gallon more than they paid to break even, Eichenberg said, and mark it up even more to make a profit.

The Oil Price Information Service shows that in 2006, the average gross margin for retailers was 13.76 cents a gallon -- meaning profit was less than a cent per gallon. Because of credit card transaction fees, the credit card industry profited more from gasoline sales last year than gas stations did, Eichberger said.

So station owners are loath to bring prices down too far too fast, especially if they're recovering from profits that were squeezed last year. Price wars hit in November and December, Oneslager said, even though wholesale prices were fairly steady and crude oil was down from its summer highs.

Crude oil prices are about $10 lower than where they were a month ago, and many market analysts are saying they could tumble even lower. The reasons include the Northeast United States' warm winter, which caused a glut in heating fuels, and traders following a wave of big funds in making bets in the market that prices will fall. Also, demand may not be as high as some had thought: the American Petroleum Institute said Friday that in 2006, U.S. demand for petroleum fell to below 2004 levels.

At this point, aside from retailers who are trying to make up big losses from last year, there's no reason gasoline prices need to stay high, Sundstrom said.

"Retailers need to see the development of a trend to lower prices. They need to be convinced that these prices will stay down. Now that we're going into third week of prices below $60, AAA's position is that a trend has been established," Sundstrom said.

He guessed that pump prices will fall further, nearing $2 a gallon in the coming weeks, as gasoline retailers ramp up the competition.

Kevin Lindemer, head of Global Insight's energy group, said that historically, gasoline prices tend to drop 2-2.5 cents for every $1 that crude oil drops in the energy markets. With crude oil prices down $10 now from its December levels, U.S. drivers are likely to see pump prices fall about 10 cents further.

That's an average of all U.S. gasoline prices; many regions are already seeing pump prices well under $2 a gallon, while others are still around $3.

Only three states, as of Friday, saw an average price under $2: Michigan, Missouri and Oklahoma. What makes these states special is lower taxes, Sundstrom said, as well as proximity to pipelines and barge routes, which make distribution costs lower. The states that generally see the highest gas prices are California, Hawaii, Oregon and Washington.

Overall, drivers should see a bit more savings when filling their tanks, perhaps enough to upgrade their coffee to a latte occasionally. But they shouldn't get too comfortable, because the spring and summer driving seasons could push prices back up. Not only does demand rev up as more people go on road trips, but the type of gasoline is more expensive to refine -- summer gasoline has to meet environmental regulations that winter gasoline does not.