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Interesting topic this fuel pricing! I have a friend that owns a Chevron Fuel Station here in Oregon. We were having a talk about this subject the other day and why two stations spaced 3 miles apart could have different prices posted.
I was thinking that they should be the same as they pay the same price for fuel, right! Oh nay say they. My friend and owner enlightened me. There is an interesting thing here that I was not aware of. It is called competitive zoning. This means that within the area that I live, say 10 miles in all directions, there are 4 Chevron stations, one being my friends. Within this same ten miles, there are three competitive zones. One station in each with one zone having 2. Each zone pays a different price for fuel from Chevron which is considered Branded Fuel.
Now here is where it gets interesting. We think that the gas company controls the price of the fuel sold or we think that the individual station controls the price. In fact, they both do, but the company has the big stick for control. Twice a week the stations are required to submit what they are selling the fuel for and if I remember correctly from my conversation, they have to list each day, the price they charged by all grades dispensed.
Now the individual station can choose to up the price or lower the price to determine his profit to some degree. If he raises it to high, we the consumer are crabby mad and call it price gouging, which it might be, but maybe not. He is trying to make a profit. If the individual station lowers the price, well heck, we all beat a path to his door and will buy everything he has. Remember what was just said here as it plays a roll in what comes up.
Switch gears for a second, don’t worry we will come back and join the thoughts together as we go through this.
The big enlightenment for me is the fact that the US petroleum market has absolutely no storage capacity. This mean that on any given day, what is in the lines coming out of Alaska, Wyoming, California, or the Gulf production sites is all there is. This means we are making it on demand and delivering as required when needed. This is important and is part of the problem in a sense. We have no storage capacity, remember this.
Fuel is being produced at a predictable rate based not on price, but on volume. Years and years of historical data gathered by the company via these twice weekly pricing reports provided by the individual stations plays a part in this because they also list how much they have sold in quantity.
Now we will bring the other gear mentioned above back in. When an individual station lowers it’s price for what ever reason, their sales will increase. If they go into a price war with a competitor rival, say Texaco, they will wind up selling everything they have in the supply that they hold and will go empty. The problem is that since fuel is not stored, but supplied as needed (to a point), they now require another fill for their tanks. This can be tolerated some times without problems to the overall supply chain, remember fuel is not stored. But if that same station continues to keep its price low, it creates a problem for the company to keep it supplied as they are pulling dynamic inventory from other stations. The company can then put the brakes on the individual station by raising the price of the fuel that the station need to have to fill their day tanks. The company can penalize the station very effectively this way.
Now think about the zones that were mentioned earlier. Years of monitoring the individual stations have created enormous volumes of data to look at and compare station to station. We know for example that one zone can charge a little more than another zone next to it. This can be because of income levels in the particular zone or where the zone is located (maybe the only one and it has a captured audience, rural for example).
So now we as a company want to have the individual station be profitable, but we don’t want him to go out of business either. We have a clear ability to control his pricing by what we charge him for fuel. We can affect his profit margin and there is nothing he can do. By the same token, if he is steady with traditional more than average volume of sales that we can keep supplied, we can reward him by charging a few pennies less. If he gets greedy and his price goes up and we have to re-supply him and not be able to deliver as much fuel to a zone next door, we can put the brakes on by charging him more.
The company control the price and using the zoning can keep the market price within a set of parameter. If the individual stations get out of line, we can penalize them.
The flip side is that if the company hurts the station (hard to prove, but has been done) then the station can take the company to court for damages. These are rare but do happen and are never public knowledge to the general consumer. My friend had to testify as a witness for his competitor who won and was awarded around $400,000 in damages because his company was penalizing him. Whoops can’t say that (penalizing). He proved it. The settlement was out of court.
Now here is one more thing to think about. When the weather come in we see the price spike more often than not because of storms or disasters. Part of the problem is that when all the consumers make a run on the stations, they actually drain about 20% of the nations given day supply of fuel that is in the lines. The refineries and pumps from the oil fields cannot make up the loss instantly, remember we have no national storage, we are using it as we are pumping it.
It is all very complicated and this is the best I can remember. The bottom line is that we have no national storage and we use it as it is produced. The pumps cannot ratchet up output instantly and the big surprise is that they cannot shut down instantly either. There is no place for the excess to go because the system is so finely balanced.
What would happen if everyone just decided not to buy gas for 1 week. The pumps can’t shut down, where is the excess going to go. The refineries can’t stop, because it takes weeks to get started again, its hard to bring them back on line and get everything balance out again.
The bottom line is that if everyone buys normal the pipelines flow and the balance remains ok.
If everyone buys all at once, the pipelines go empty because the refineries cannot increase, because they are almost at peak now, (we have not built a refinery in 30 to 40 years).
If everyone stopped buying, the pipeline is full and needs to be relieved because there is no storage, the company has to provide an incentive for the consumer to start buying again, because he has no place to store excess fuel and if he stops the refineries, he then faces the terrible problem of getting it started again and the distribution balanced out through the network of the supply system.
The pumping and refining production quota’s that the companies use have been developed a couple of years in advance. The whole system is a monster that once stopped is almost impossible to restart without a great deal of discomfort to the public.
Yes they are making big buck and they do control to some extent what we pay, but because we as individual in a nation have no way of acting as a collective unit have little influence other than when we collectively get the jitters and make a run on the pumps.
If we could collectively as consumers all buy or control our buying as a group, guess who will get control of the price. There are what, a dozen oil companies that provide the fuel to the entire country. It is easier for them because they don’t have as many people to control. How many consumers are there and how could we collectively think as a single individual. If we could do that and control when we as a group buy or which to buy fuel, then I think we could create lower prices.
I might be wrong, but I don’t think I am.
Food for thought guys.
Attention: TDR Forum Junkies 
. Don't want to cause a war on this topic, but just wondering what others are paying and there view on this.
$2. 29 for Super Unleaded?? Man alive, I paid $2. 89 for Regular Unleaded yesterday and Diesel was $3. 09 I think. $3. 79 was our peak boom price for gas, while Diesel stayed at about $2. 89. Very volatile market to say the least, the ROI on those home brew BioDiesel units is getting much shorter all the time...
