Fuel's journey adds to cost

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Fuel's journey adds to cost

From crude oil production levels to pricing, gas must go through series of steps before reaching consumers

Web posted Mar. 25 at 11:12 PM

By Damon Cline Staff Writer

The oil industry, like any free-market business driven by supply and demand, has winners and losers.

If you have been to a gasoline pump lately, you already know where you fit in.

At the other end are the usual suspects: the 11 countries that make upthe Organization of the Petroleum Exporting Countries.

In between are oil companies, freight companies, independent refiners, pipeline companies, terminal operators, wholesalers, retailers and, of course, the tax man. Each gets a piece of the action as the precious commodity trickles down to you, the consumer.

But it all starts with OPEC, the cartel whose members supply 40 percent of the world's crude oil and possess three-quarters of its proven reserves.

It controls global crude oil prices by regulating its production. When it deems prices too high, production is increased. When prices are too low, production is cut.

From oil well to gas pump To understand gas prices, you must understand how crude oil becomes gasolines and how it gets transported here, as each affects the final cost at the gas station.

The United States pays these global prices because it imports more than half its oil.

``As long as we import 55 percent of our crude oil, we basically have to take our supply at world market prices, irrespective of whether it comes from OPEC or not,'' said Dr. John Felmy, director of policy analysis for the American Petroleum Institute.

America has come to rely on foreign oil because it is cheaper than what can be produced domestically, particularly in times of price stability.

OPEC first flexed its muscles in 1973, in a political response to U.S. involvement in the Arab-Israeli War. The result was a yearlong energy crisis, which led to gas rationing and a spike in prices that never went down.

Today, the pain you feel at the pumps stems from OPEC's decision 18 months ago to slash production to boost crude oil prices that had fallen to record lows because of a string of mild winters and the economic collapse of several developing Asian countries.

``When the Far Eastern economies went down, a lot of demand went down with it. Then Iraq came back on the market for crude oil shortly before that,'' said Dave Costello, forecaster for the U.S. Energy Information Administration. ``All of those things together generated excess inventories.''

The United States, which consumes 20 million barrels of crude each day, reaped the benefits.

Augusta-area residents, already used to paying low prices because of the state's lax gas tax, fueled up for less than 70 cents a gallon at some locations last spring.

But thanks to OPEC production cuts, the pendulum has swung in the opposite direction. OPEC says it just wants a happy medium.

``We don't want silence when prices fall and an uproar when they rise,'' Qatar's emir, Sheik Hamad bin Khalifa Al Thani said.

According to OPEC's official Web site, it's mission ``is to maintain steady supplies of oil to consumers, while achieving a reasonable price for that oil.''

OPEC says that reasonable price is currently $24 a barrel, about $10 less than the nine-year high reached March 8, but $14 higher than the record low of 1998.

Who gets the money?

State-run oil empires aren't the only ones profiting from current crude prices. Major oil companies engaged in exploration, such as Exxon Mobil, Texaco and Royal Dutch/Shell, fetch more for their oil, too.

However, their profit margin is narrower because the fields they explore are costly to tap, particularly those at sea or in environmentally sensitive areas, such as Alaska.

And many of the fields are not as prolific as those found in OPEC nations. An oil derrick in Texas, for example, yields several hundred barrels a day, while free-flowing wells in the Middle East gush several thousand.

Big oil company representatives maintain their industry isn't getting rich off the recent price spikes. They point the finger at OPEC.

``The guys profiting from this are the same guys who were hurt the most by the fallen prices,'' said Rick Cobb, director of the Georgia Petroleum Council, an association representing major oil companies in the state.

The people at the bottom of the oil industry food chain, the retailers, say they aren't rolling in cash either.

``If I owned an oil well right now, you'd be calling me long distance in the Caribbean,'' said Marty Koger, co-owner of Koger-Walters Amoco, a 12-station convenience store chain.

Knowing how crude oil is priced explains a lot -- but not everything -- about the complicated nature of gas prices.

After all, if your car ran on crude oil alone, a $30 barrel of fuel would sell for 71 cents a gallon.

The oil must be transported to refineries, made into usable products and then transported again to consumers across the country.

Markups and margins

Slightly more than half of gasoline's retail price are costs associated with purchasing crude, refining it, transporting it, storing it and marketing it, according to the American Petroleum Institute. Taxes and profit margin account for the rest.

Augusta gets the majority of its petroleum products from the Colonial Pipeline, a Texas-to-New York tube that feeds bulk storage and distribution facilities across the eastern United States.

One of those facilities, known in the industry as ``terminals,'' is in North Augusta.

There, wholesale petroleum distributors, known as ``jobbers,'' purchase tanker truck-sized loads of gasoline for resale to retailers. Many jobbers are retailers themselves, such as Mr. Koger, while others simply sell to independent chains and the few remaining ``mom and pop'' filling stations.

The retailer gives the gasoline one last markup before purchase by the consumer. Few retailers disclose their profit margins, but most agree it's the thinnest of any segment of the oil business.

Ray Gliniski, an Aiken resident and former convenience store operator, said he used to make as much as a dime profit on each gallon sold, depending on the fuel grade.

But that was long ago. In this climate of extremely inflated prices and heavy competition, he wonders how retailers can make any profit at all. That's why sales of convenience store goods -- beer, cigarettes, lottery tickets -- are crucial to the retailer's bottom line.

``I'll bet they're making no more than a half-cent a gallon on regular,'' Mr. Gliniski said. ``The most they make is probably seven-eighths, and that's on premium.''

OPEC oil ministers meeting in Vienna on Monday are widely expected to approve a production boost that economic officials say will cause prices to drop beginning in late summer.

Gas prices likely will remain above 1998 levels but will be low enough to quell outcry from consumer nations, energy analysts predict.

Then, if history repeats itself -- and many predict it will -- there will be another long period of price stability. Then another global event will occur, causing producer nations to turn off the spigot. And once again, consumers will be shaking their fists at gas station billboard signs.

``(OPEC) didn't anticipate demand would fall off as it did in '98,'' Mr. Costello points out. ``The information they and the rest of us have is not perfect. As long as men can misjudge the world, it's going to happen again.''

http://augustachronicle.com/stories/032600/tec_129-6130.000.shtml

-- Martin Thompson (mthom1927@aol.com), March 26, 2000


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