High gas prices traced to refineries

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High prices traced to refineries Reformulated fuel price gap narrows at pump

By RICK ROMELL

of the Journal Sentinel staff

Sunday, June 4, 2000

The prices being charged by oil refiners -- not those of the retailers selling reformulated gasoline -- appear to account for the current difference in the cost of reformulated and conventional gas in Wisconsin.

As politically charged finger-pointing over soaring gas prices continues, figures from a leading supplier of petroleum data support what retailers have been saying: The big price premium for reformulated gasoline is being claimed by the oil companies or intermediaries who may buy the fuel before it hits the wholesale level.

"I think that's a fair statement. . . . This is a bonanza time for refiners making reformulated gas," said Ben Brockwell, editor in chief at Oil Price Information Service.

The firm, of Lakewood, N.J., surveys gasoline prices at tens of thousands of outlets daily, and its data is widely cited. Among users is the American Automobile Association, a longtime client.

Besides tracking retail prices, the firm checks wholesale prices at gasoline terminals such as the Granville tank farm on Milwaukee's far northwest side. The so-called rack price is what is paid by a wholesaler who then delivers gas to filling stations, or by the retailer himself if he picks up his own fuel.

Last week, the average Milwaukee rack price for reformulated gas - - required in six southeastern Wisconsin counties because of high levels of air pollution -- topped that of conventional gasoline by as much as 31 cents a gallon, figures show.

The difference at the pump, however, was much narrower -- in the 15- to 20-cent range.

That indicates that retailers who must sell reformulated gasoline aren't passing on all of their increased costs, a representative for the merchants said.

"They're eating some of the cost in order to stay competitive," said Bob Bartlett, executive vice president of the Petroleum Marketers Association of Wisconsin/Wisconsin Association of Convenience Stores.

In the Milwaukee area, where reformulated gas is required, the average for regular on Friday morning -- just before a big weekend price bump took effect -- was $1.81 a gallon, according to the AAA Wisconsin chapter.

In Madison and Green Bay, where conventional gasoline can be sold, regular averaged $1.63 and $1.66 a gallon, respectively, AAA said. An informal spot check on Thursday and Friday of 12 stations closer to Milwaukee but still outside the reformulated area found an average of $1.66 for regular.

The situation is complex. Rack and retail prices change daily. A large increase in wholesale and retail prices hit the area this weekend, and it wasn't known whether the same factors at play in the wholesale and retail markets last week carried over into the weekend's large price increase.

Further, some informal surveying has suggested that AAA might be understating the price of reformulated gasoline.

And one petroleum marketer in Waukesha said a reason the retail price gap doesn't match the spread at the rack is that stations outside the reformulated-only area are keeping conventional-gas prices higher than they otherwise would, boosting their profit margins.

"My margins are way down from what I normally try to get," said Randy Warren, co-owner of Dairyland Fuels Inc., a Waukesha firm that owns stations in the reformulated area. "And anybody selling conventional . . . unless they're really insulated -- I mean they're a long way from this hell that we're in down here, they're making a lot bigger margin, is what's happening."

Erin Roth, executive director of the Wisconsin Petroleum Council, which represents oil companies, disputed the suggestion that oil companies alone are capturing the premium on reformulated gas.

"I don't know if I'd agree with that," Roth said. "But yes, there is a big spread, although from what I've heard, it's coming down somewhat."

But Brockwell, industry consultant David Hackett and even one oil- company representative all agreed that refiners are enjoying healthy profits on the reformulated gasoline sold here.

BP Amoco spokesman Tom Mueller covers the retail end of his firm's business, not its production phase, but speaking generally he said, "The refiners, I think, are making pretty good money right now."

Although reformulated gas has been selling for 30 cents more at wholesale, Brockwell estimated it costs refiners less than 10 cents more per gallon to make the fuel than for conventional gasoline.

But oil-company representatives point to the big capital investments their firms have made so they can produce the cleaner- burning reformulated gasoline now required by the U.S. Environmental Protection Agency in high-ozone areas such as southeastern Wisconsin.

"To supply the Milwaukee market, we invested over $10 million in our refinery to be able to make a new gasoline," Mueller said.

And underlying the reformulated-conventional price gap, both oil company representatives and observers such as Brockwell and Hackett say, is the most fundamental of economic laws -- supply and demand -- coupled with a dose of uncertainty.

For a variety of reasons, they say, reformulated gas is in short supply. Among them:

-- The reformulated gasoline sold here and in the Chicago area -- where prices also have soared -- is a different blend from that used in most other parts of the country. The product here is made with ethanol, not the more commonly used chemical MTBE. That shrinks the potential pool of gasoline that might be shipped in from elsewhere to bolster supplies.

(The EPA is moving to ban use of MTBE, or methyl tertiary butyl ether, over the next three years because it has been found to pollute groundwater.)

-- Unocal Corp.'s so-far successful federal-court defense of its patents on formulas for summer-blend reformulated gasoline has deterred some refiners from producing the fuel for fear they will be assessed costly licensing fees.

"If they use this formula, they have to pay Unocal a ton of money, and so there's speculation out there that this thing is going to cost billions of dollars, and it's driving prices upward," Roth said.

-- Worries about the effects of the 10-day maintenance shutdown of a major pipeline supplying Milwaukee have fueled speculation and driven up prices.

"You've got all of these things that converged, and supply tightened . . . and any time you have a tight supply situation, the price goes up," said Kent Young, public affairs manager for Citgo Petroleum Corp.

And things could stay tight all summer.

"It's just a different type of fuel, and I have heard that there may be problems all summer long . . . because of the use of ethanol as opposed to MTBE," Roth said.

Warren, whose Dairyland Fuels also sells wholesale, said he had heard the same thing from his supplier but is hoping that mounting political pressure will bring relief sooner.

There is some history to suggest reformulated gasoline prices will come back down.

The EPA has required the use of reformulated gas in southeastern Wisconsin since 1995. The current furor -- with Democrats launching investigations into suspected price gouging and Republicans blaming the federal government for the high prices -- is swirling around a new phase of the product required to meet tougher rules.

When the earlier phase was first mandated, it, too, sparked a gap - - although a much narrower one -- between the price of the reformulated gas required in southeastern Wisconsin and the conventional fuel allowed in the rest of the state. After several months, most of the gap closed.

Similarly, California's 1996 requirement for cleaner-burning gasoline initially boosted prices there by 10 to 15 cents a gallon, but they dropped once production and distribution of the new fuel became routine, California Energy Commission spokesman Rob Schlichting said.

Meanwhile, Hackett, a California-based consultant who worked for a major oil company in the Upper Midwest in the late 1980s, predicted prices here will drop.

The 30-cent wholesale price spread between reformulated and conventional gasoline -- compared with extra production costs of less than a dime -- is a "fortune" to refiners, Hackett said.

It's also an irresistible incentive, he said, to boost production, which, in turn, ultimately will bring down prices.

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-- Martin Thompson (mthom1927@aol.com), June 04, 2000


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