For those of us who work in the fuel marketing segment of the oil industry, we have been living with the perception that fuel marketers and retailers are enjoying some grand benefit from the higher prices of oil. I know I get "assaulted" with this perception in virtually every conversation I have with friends, acquaintances and other business people.
Gasoline-the number one consumer item in America--is a "grudge purchase" at best. In the documentary film The Prize, the author denotes that we American's are in love with the automobile, yet we have complete disdain for the product that propels it down the road...and, we are the most mobile society on earth!
Gasoline Marketing 101:
How is the retail price of gasoline set? Basically, by the "lowest common denominator". On any given street in the U.S. there are typically several retail businesses where one can buy gasoline. Whichever retailer attempts to sell their gasoline the cheapest is the one who sets the price. Competition is forced to match the lowest price, for studies have shown that there is very little loyalty from consumers; they will go down the street, or further, for as little as 1 cent per gallon. On a typical fill up, this saves them about 15 cents to 30 cents.
The wholesale price of gasoline is set essentially in the same manner, but with some nuances only companies engaged in the industry would ever take enough interest in to understand. The most prolific driving factor in wholesale gasoline pricing is the "cash commodities market". Each second the New York Mercantile Exchange is open, gasoline futures contracts change in value. The closing value each day drives pricing and is used by gasoline refiners and traders to set the wholesale price for gasoline marketers.
Competition in the gasoline industry has never been more intense. There are over 6,000 independent wholesale and retail oil companies in the United States. These companies sell the majority of the product directly to those who consume the product, whether at retail outlets or in bulk commercial deliveries.
The best measure of return in any business today is "Return on Capital Employed". This metric tells a business whether or not they are controlling their costs and have the real ability to be competitive. What is so elusive to the American gasoline consumer is the assumption that the oil industry works like most other businesses, meaning you earn a percentage of profit on each dollar of goods sold. The gasoline marketing industry doesn't work that way. In a good year in the Mid-Continent portion of the U.S, the profit margin opportunity on a gallon of gasoline is about 10 cents per gallon. This held true when gasoline was $1 per gallon and it holds true at $4 per gallon. One doesn't have to be a mathematician to see what has happened to the "Return on Capital Employed" for those of us competing in this industry.
You can see that for those of us working in gasoline marketing, we had a much better profit opportunity (and a much lower risk liability) at $1 per gallon. I can assure you that we all hope the supply and demand balance will drive prices back down to a level where our opportunity is better.
Life in America is all about opportunity and, while sometimes difficult, we at CarterEnergy are thankful for the opportunity to live in this great Country and to be a part of commerce.
If you are a gasoline consumer, I hope this has helped you understand some of the complexities of the oil industry.
If you are a CarterEnergy customer, we thank you immensely for the opportunity to serve you!