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Gas prices reflect more than the cost of oil

TBO.com The Associated Press
Published:   |   Updated: March 19, 2013 at 10:00 AM

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When Jay Ricker, owner of a BP gas station off Interstate 70 in Plainfield, Ind., set the price of unleaded gasoline at $3.44 a gallon on Feb. 28, it was 4 cents higher than the Friday before.

That alone might have been irritating to drivers paying the highest gasoline prices in more than two years. It was even more so because it happened on a day when the price of crude oil, which is used to make gasoline, fell almost $1 a barrel.

"It's up 20 cents one day, down 10 cents the next day," says Oscar Elmore, a courier who was filling up his Ford Taurus at a RaceTrac service station in Dallas recently. "It sounds kind of fishy to me."

Gas prices rise when oil prices rise and fall when oil prices fall - except when they don't. What you pay at your gas station depends on an array of factors, from what happens on an exchange in New York to what the competition is charging.

This can rankle drivers, especially these days. Gas reached a national average of $3.51 a gallon on Monday. That's up 14 cents, or 4 percent, in the past week. The week before, the average rose 20 cents, the steepest increase since September 2008.

A year ago, the price was $2.75. The average is the highest it's ever been this time of year, and analysts expect it to climb higher in the coming weeks.

Unlike an iPhone or a pair of jeans or a Big Mac, oil and gas are commodities, and their prices can change every second at the New York Mercantile Exchange and other trading hubs. Those far-off changes affect the cost of the next day's commute.

Sellers of commodities, including gas-station owners and refineries, price their product based not on what it costs to produce it but on what it costs to replace it. Stations such as the Plainfield BP, which gets shipments of gas several times a week, must constantly adjust prices to keep up with the changing costs of shipments.

Oil is the biggest factor in gas prices. It accounts for 50 percent to 70 percent of the cost. Recent upheaval in the Middle East and strong demand for oil around the world have pushed oil prices over $100 a barrel for only the second time in history. The price of a gallon of gas at the pump rises - and, yes, falls - for a number of other reasons.

Oil prices can be moved by geopolitics, the value of the dollar, extreme weather or demand in China. Gas prices can be moved by oil prices, refinery problems or even weather that might keep drivers at home.

Wholesalers such as BP or Gulf Oil have their own formulas for setting the wholesale price, known as the rack price. In an attempt to smooth out the spikes and dips of the market, a wholesaler usually buys some of his fuel through long-term contracts. The rest is bought on the so-called spot market, priced at a given moment by a benchmark such as the New York Harbor gasoline price.

At 5 p.m. daily, BP tells Ricker what the rack price will be starting at 6 p.m. That price is good for 24 hours.

Then Ricker decides what price to charge customers based on his ultimate concerns: the Speedway and Circle K stations that share an intersection with him.

There are only two or three pennies a gallon in profit selling gas for most station owners. What Ricker really wants is to attract customers to sell the truly precious liquids: Not the gasoline and diesel outside, but the water and soft drinks inside.

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