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Gas expert: ‘My crystal ball has been shattered’

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As gasoline prices hovered around $1.90 per gallon in Greater Des Moines, as of Thursday, the Business Record asked Jennifer Moehlmann, an energy data analyst for the Iowa Department of Natural Resources, to help take some of the mystery out of pricing.

Q: How are prices at the pump determined?

A: The per-gallon price at the retail level is established by what stations are charged by fuel jobbers, who deliver gasoline from the terminals. Refineries make the gasoline, which typically comes from the Gulf Coast, then send it via pipelines to the terminals, where it’s stored. Wholesale jobbers buy it for rack prices at the terminal, then negotiate with the retailers. Wholesale rack prices are mostly determined on the commodity market, as the prices for corn or soybeans are.

The biggest misconception is that retailers just jack up the prices to take advantage of consumers, especially around holidays. It’s not the retail stations; it’s the entire supply chain. Demand can increase 10 percent or more just for a few days over the “driving” holidays like Memorial Day.

Q: How much time passes before increases in crude oil prices are seen at the pumps?

A: It really depends on the magnitude of the increases. It’s done on a station-by-station basis. Sometimes, they hold off to protect customers. If they take some losses, they may not be able to bring prices down as quickly as prices come down on the market. Over a year, they expect the gross profit margin to be 8 to 10 cents per gallon, but during some parts of the year, they may be losing money. These are some of the lowest profit margins in the country. On the West Coast, they are in the 20- to 22-cent range. They need to make larger profit margins because the real estate is more expensive and they have to use reformulated or specialized blends of gasolines to meet environmental standards.

Q: Why is there often a variance of several cents per gallon in different regions of the state of Iowa? For example, over the Memorial Day weekend, the highest price in Greater Des Moines was $1.95 per gallon, while the highest price in the Quad Cities was $2.05 per gallon.

A: The Quad Cities are almost always higher, because the pipeline that serves the terminal also takes gasoline to Chicago. It’s more expensive to keep it in the terminals than to flow it on to Chicago. In Dubuque, it’s usually a few cents more, because it’s also influenced by the higher-priced market in Chicago. Large cities, where the demand is high, command higher prices and use more specialized fuels, which keeps prices higher overall.

Part of the variable is competitive strategy. Do they want to make a profit off a gallon of gas or inside sales, mechanical service or car washes? It also depends on the size of the chain, what they have to pay their employees, lease costs and whether it’s branded gasoline. Larger chains have more pricing power and can buy in bulk. It depends on the daily demand, and how far they are from the terminal influences transportation costs.

Q: Who’s making the most money off the high prices?

A: Non-industry speculative firms — large investment firms, brokers, anybody who’s not involved physically in the business —are part of the reason prices are so volatile. It’s just on paper, and they never have plans to take delivery of a barrel. Out of everyone, they’re making the most because they don’t have an investment in the infrastructure.

Q: What’s ahead?

A: My crystal ball has been shattered. It’s hard to look at historical averages because we’re 20 cents above the previous high for gasoline, in June 2000. Two added things are making it more uncertain. First, new Environmental Protection Agency ruless require lower-sulfur-content gasoline, and some of our traditional foreign gasoline sources won’t be able to sell it. Refiners have know about it, and some foreign suppliers are making adjustments to produce lower-sulfur gasoline, but it’s only required in the United States.

Second is fear of terrorism. That’s what’s keeping the market jittery. Just today (June 1), there was a $1.50 increase in the cost for a barrel of crude oil because of terrorist attacks on oil company compounds in the Saudi Arabia oil city of Khobar. A movement of $1.50 in a day is huge. In the market, there are short and long positions, and the general sentiment is it isn’t safe to be short on crude oil, because we don’t know where or when the next attack will be.

Until we see some stability in the Middle East or a ratcheting back of demand, I see a lot of volatility.