The real deal on fuel pricing
Leading into last week’s elections, energy was, surprisingly to many, a weak topic of debate. Yet we still dream of a future weaned off fossil fuels, and the price of gas ticks upward in the background, despite sex scandals and fiscal cliffs.
Recently I gathered a number of questions on fuel pricing sent from readers, and decided this week might be a good time to answer, collectively.
Here are three such excellent questions and my respective attempts at explication.
Question: "When a barrel of crude oil was $140, the price of a gallon of gas was $4 plus. Now that crude oil is around $80 a barrel, shouldn’t a gallon of gas be much less?"
Answer: Not necessarily. The pricing of light sweet crude follows certain conventions. Other than insider circles or business news, what the public sees is a number that represents the wholesale price per barrel.
What’s less emphasized are the words which address the timing of fuel release. For example, this week a barrel of oil was quoted by one energy source as: "Wednesday, November 14, 2012: NYMEX Light Sweet Crude Oil for January delivery closed down $0.03 at $86.72 per barrel."
That’s a lot of verbiage to digest -- much of it irrelevant. What’s pertinent, however, is the phrase "for January delivery."
Oil prices are determined on futures markets, which are speculative. A future is a financial contract obligating a buyer or seller to deal a commodity at an agreed upon future date and price. When a wholesale distributor buys bulk fuel from a supplier, that price was fixed months before delivery. By the time it’s available for distribution to retailers, any interim flux in crude oil quotes won’t influence gas station prices.
And importantly, for those of you who like taking aim at gas station owners, the retailer’s profit is about a penny or two per gallon.
Question: "Throughout most of my life, diesel fuel was always the same as a gallon of gas, often less. Why is it now more per gallon?"
Answer: Several reasons. In the past, diesel has indeed surged in price past that of gasoline, so there actually has been divergence from the historical pattern suggested above.
Consider the pricing fundamentals of diesel. Two-thirds of what you pay at the pump consists of the crude diesel quote for time of delivery. Then one-fifth covers the cost of refining, and one-tenth is taxes. What remains is 5 percent devoted to distribution and marketing. As with gasoline, the retail profit is usually a penny per gallon.
The current fluctuation vis-à-vis gas has more to do with these breakdowns rather than with gasoline itself. While world demand, particularly in the U.S., has been known to fall drastically at times, certain elements of diesel pricing continue to influence its retail rate.
Most importantly the move to ultra-low-sulfur diesel fuel has affected production and distribution costs. Refining and subsequent transportation expenses have increased. The latter is important, as locations farthest from the Gulf Coast - which produces 50 percent of U.S diesel -- are hit hard as a proportion of its final price. New England (ahem!) is one of those places.
Also, the federal excise tax on diesel fuel is 6 cents higher per gallon than the tax on gasoline. Ratchet up diesel’s logistical costs, throw in a higher tax and the result is more expensive diesel.
Question: "Gas and oil prices have always gone down before a national election since the 1960s. Why are prices jumping after the election?"
Answer: Anyone paying attention in the week following President Obama’s re-election noticed a pricing surge. But going down before an election is one thing; collapsing at record rates is quite another.
This is the trickiest question. Prices should hold steady long term -admittedly at a high level - especially if Americans continue drastic cutbacks on their driving, and find alternative sources to heat their homes. At some point, if crude prices per barrel drop precipitously, OPEC will be forced to slash production.
The key is the strength or weakness of trading exchanges. If market volatility occurs, speculators who thrive in futures should continue to bail out, leaving little cause for higher wholesale prices. It sounds like a cop out, but we must wait and see the trend over the next 12 months.
So that’s the real deal on fuel. Drive a little less. Use some electric heat. We’ve already made a difference, but winter is coming. It all adds up, or someday, hopefully, down.
Telly Halkias is an award-winning freelance journalist. You may contact him at email@example.com.
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