Erratic gas prices explained by experts

Thursday, April 8, 2004 | 11:14 a.m.

But with a commodity that often defies the free-market concept of pricing, there was a viable explanation for why late March and early April prices fluctuated so greatly, one industry expert said.

"There was a switchover from the winter blend to the summertime blend fuel on April 1, and with tons of (winter oxygenated) gas left in the (underground) tanks, retailers sold it low to get rid of it," said Peter Krueger of the Nevada Petroleum Market and Convenience Store Association.

Sean Comey, spokesman for AAA Nevada -- formerly the Automobile Association of America Nevada -- said that theory "stands to reason."

Krueger, whose organization represents wholesalers and retailers, said there are misconceptions as to why gasoline prices are the way they are -- why fuel could sell for $2.15 in one part of town and $2.05 cents in another on the same day -- but, in general, gasoline sells "for what the market will bear."

And, there are a number of factors that go into what the dealer sells his various grades of petroleum for on any particular day.

"The free market has a lot to do with it, but unlike with other products, there are limits," he said. "An independent gasoline company, for example, faces the artificial barrier to a free market that he can only buy from sources that have blends legal to sell in Nevada for air quality reasons.

"Also, while a branded dealer (Chevron, Texaco, Shell, etc.) can sell only gasoline from the particular refinery, the wholesale prices vary because of zone pricing."

Zone pricing, he said, occurs when major oil companies determine what the market will bear in any one part of town.

For example, Krueger said, consumers on the Strip will, for convenience sake, pay higher prices as will motorists at stations on the corridors toMcCarran International Airport who have to fill tanks before returning their rental cars.

However, in more rural parts of town, gasoline prices are lower to get people into the stores to buy other products along with filling their tanks, he said.

But that, Krueger said, does not mean that a retailer can indiscriminately sell gasoline for as high or as low a price as he wants.

"If you price too high you will sit on a very expensive product that won't move," Krueger said.

"And if you want to get into an old fashioned gasoline price war with three neighboring corner stations -- and you constantly try to be the lowest -- you will run out of product and may have to wait a day or two to get another shipment. So you cannot always be the lowest man."

Comey also noted that demand for gasoline nationwide is up 4 percent, an indication that the spring and summer could be a "robust travel season."

"Despite the high fuel prices, people are not changing their vacation plans," he said. "We are likely to see a steady supply of tourists. But that means the demand for gasoline will increase, which could put further upward pressure on gas prices."

Comey said consumers need to do a better job shopping for the best prices and communicating with their favorite retailers.

"When it comes to gasoline, we have to be more savvy as shoppers," Comey said, noting consumers who are regulars at a particular station, and believe the proprietor can sell his gas at lower prices, can tell him so.

"You can politely tell him, 'I usually shop here but your gas prices are too high so I am going to shop elsewhere. But I will return if you lower them.' If enough customers say something in any type of business a good manager knows the importance of customer loyalty and will address it."

Krueger, however, said there are times when retailers do not have a whole lot of wiggle room when it comes to setting gasoline prices. Krueger said the dealer may make 10 cents on a gallon of gasoline, but that may be lower depending on competition.

"My members are not making the profits that the major oil companies are making," Krueger said, noting that consumers are quick to blame the retailer for being in bed with the wholesaler and refinery.

On its Web site, the ChevronTexaco company addresses the issue of why gasoline prices rise and fall, noting that "the greatest single factor affecting gasoline prices over time is the cost of crude oil."

Crude oil has been selling for about $38 a barrel. When gas was selling at much more reasonable rates, crude was selling for less than $20 a barrel.

To that end, ChevronTexaco places much of the blame for high prices at the feet of the faceless, foreign villain, the Organization of Petroleum Exporting Countries or OPEC.

OPEC in February announced it would reduce production by one million barrels a day -- about 4 percent of production -- beginning April 1, putting added pressure on crude oil prices, ChevronTexaco said.

OPEC's members account for nearly 40 percent of the world's production of crude oil and hold about 67 percent of the world's estimated crude oil reserves, according to the U.S. Energy Information Administration.

OPEC countries export 4.6 million barrels per day to the United States, which is 40 percent of U.S. imports, according to the U.S. Department of Energy.

On the local consumer level, ChevronTexaco said retail gasoline prices often fluctuate because of "local marketplace conditions and factors such as seasonality.

"The retail price of gasoline increased in California in the month of February to an average of $2.03 per gallon, in part because several planned and unplanned shutdowns at competitor refineries. (That) caused a reduction in the already tight supply of California's unique blend of gasoline."

That, the refiner said, "generated a sharp run-up in wholesale markets."

According to the U.S. Energy Information Administration, as of March 1, California prices averaged $2.11 per gallon after gaining 8.0 cents the previous week.

According to AAA's daily survey of gas prices, California on Wednesday had the highest price in the nation for unleaded regular, the blend for which market trends are determined, at $2.18 per gallon. Hawaii was second at $2.13. Nevada was third at $2.08, up a penny from a month ago and 8 cents from a year ago.

The national average Thursday was $1.77 for a gallon of regular unleaded, up five cents from last month and up 15 cents from a year ago, AAA said.