What’s really behind gas price hikes?

Dear Bob: I really enjoyed your recent tongue-in-cheek column about how gas prices are set, tracing the whole thing back up the line to Billy Joe’s place. It really got me thinking, after my next trip to the pumps, about how the prices are really set.

It galls me to see prices at the pump increase within one or two days of news telling us of a supply problem somewhere. How long does it actually take to go from the well to the pump? I can’t believe the supply system is efficient enough to accomplish transportation plus refinement in that short a time.

So, then, aren’t we paying more for what was already in the station’s tanks at the old/original price? And why can’t they make reductions in prices with the same haste that they make increases?

I begin to sense a “conspiracy” when we are told that we really have not been paying a true, inflation-adjusted price all these years. So the public becomes complacent and doesn’t protest loudly enough and, now that crude has fallen below $50 a barrel again, we are not back to those comparable pump prices.

Aren’t we being manipulated by an industry that made record profits from these supply problems? It takes the wind out of my efforts to be fuel-wise when the supply chain isn’t trying to help me!

Forgive my ranting and fuelish questions, but I’d love to hear your opinion on the matter.

Best regards and keep up the great work.

— J.S., Hagerstown, Md.

A: First off, I think the conspiracy theory died a lingering death during the last gas crisis. It still seems to kick up its limp heels now and then, however, as your letter proves.

Nonetheless, you raise a good question: It obviously takes much longer than a few days for a given gallon of gasoline to get from the oil well to your local service station, so why does a station raise prices on fuel that is already in the station’s tanks, bought and paid for at a lower price? And why don’t prices adjust downward as quickly as they adjust upward?

For a response to your suspicions of profiteering, I took your letter to Ron Planting, a Washington-based analyst for the American Petroleum Institute, and asked him to comment.

You must remember that we import nearly 60 percent of our oil, Planting told me, a huge amount that is subject to market fluctuations and the vagaries of the political situation. It is therefore not uncommon to see wide swings in the price of crude oil on a daily, even hourly basis. And indeed, at this writing, the price of crude is back above $50 a barrel, and it may well be down again by the time this column is published.

The price of crude oil is the factor that drives all other prices, from the refinery cost to the final destination price at your local corner station. If the price of crude goes up, you will pay more at the pump, whether it be the next day or the next week. If the price goes down, likewise, you will pay less, perhaps the next day or perhaps the next week, depending on the individual service-station operators — some of whom may be tempted to drag their feet to realize a little extra profit.

According to Business Week, Planting added, the oil-and-gas industry averaged profits of about 7.5 cents per dollar during the final quarter of 2004, while all other industries had a combined average of 8.8 cents per dollar. No conspiracy here, he said, only a slightly below-average return per dollar on the money invested.

There are about 165,000 service stations in the United States, and they are very competitive. If there is a disruption in the supply chain somewhere in the world or even at the refinery, or even if there are merely rumors that OPEC is going to bump prices at its next meeting, the owners of these service stations protect themselves by raising the price of what is already in their tanks to offset any future higher prices that they fear they may have to pay due to the disruption.

It’s kind of like carrying an umbrella, Planting said. You may not need it when you take it, but you carry it because of the rain that could fall.

That’s the industry’s take on the situation, anyway. I hope it’s provided some insight into an admittedly very complicated issue.

AMERICAN DRIVERS FIGHT BACK

Here’s a tip that will help you get better gas mileage while fighting terrorism and cutting our nation’s dependence on Mideastern oil:

If two cars are exactly alike in every respect except that one is carrying four passengers while the other carries only the driver, the fuel efficiency of the one with the extra passengers will decrease by 6 percent to 12 percent due to the extra weight. For every 100 pounds of added weight, your mileage decreases by between 1 percent and 6 percent, depending on the size of your car and its engine.

With gasoline prices soaring, there is no better time to remove nonessential items from your vehicle. Check the trunk, the hatchback and under the seats for items you don’t need.

Remember, you pay for any extra weight in extra gasoline burned. Make sure that whatever you carry — yes, even your mother-in-law — is truly necessary.