Fueling prices

Brad Andrew grew up in Massachusetts, and whenever the Juniata College associate professor of economics and international studies decides to drive home, he fills his gasoline tank before entering New York and Connecticut.

The reason: They have the highest state taxes on gasoline in the nation – 49.6 cents per gallon in Connecticut and 49.5 cents per gallon in New York.

Pennsylvania, at 32.5 cents per gallon, ranks 14th.

State taxes, the price of crude oil, supply and demand and competition all are factored into what people pay when they pull up to the pumps.

Up and down

The first part of this year has been unusual with respect to gasoline prices. Regular unleaded gasoline in the Altoona area has risen 34 cents a gallon since the beginning of January, Andrew said, but traditionally, prices usually don’t start going up until March or April.

“Supplies are generally higher at this time of the year. [This year] demand seems to be higher. It could be because people feel more confident about the economy and are driving more. We’ve had better weather this winter,” Andrew said. “The cause could also be external: A strong growing demand from China is driving up the price this year.”

Prices typically peak shortly before Memorial Day weekend as refineries begin to produce summer blend gasoline around May 1.

“It can take three weeks to get the summer blend from Houston to Pennsylvania. That is why the seasonal peak here is usually just before Memorial Day,” Jeff Lenard, vice president, industry advocacy, for the National Association of Convenience Stores, said.

The distance gasoline is transported from the refinery to the pump also has an impact on the price.

“The further it has to go makes the price higher. In the Northeast, we pay higher prices than states near the Gulf of Mexico or where the refining is taking place,” Edward Timmons, associate professor of economics at St. Francis University, said.

The faster it rises …

Both Lenard and Andrew are familiar with the “rocket and feather theory,” which they said can annoy consumers: When the price of crude goes up, the price of gas will go up quickly, like a rocket. On the other hand, when it falls, the price of gas goes down slowly, like a feather.

“There is a little bit of truth to that,” Lenard said.

He explained that there is a lag between when oil prices and/or wholesale prices rise and when retail prices rise, and the same holds true when they fall. He said while most consumers never notice that initial lag, if both oil prices and gas prices are rising, it appears that they are in lock step. However, he said, they aren’t in unison, because the retail price got a later start.

Once the oil price peaks and begins to drop, there also is a lag for it to be reflected at the pump as retailers seek to capture higher profits to make up for the tighter margins that they experienced when prices were climbing.

The price of crude oil is the biggest driver of pump prices, making up about 66 percent of the cost of a gallon of gasoline, Andrew said.

“Crude oil is sold on the commodity market and can go up or down 5 cents a day on the average. It [the price] is driven by the financial markets. The price of crude oil is set by the futures markets and driven by financial institutions,” said Mike Lorenz, Sheetz Inc. executive vice president for petroleum supply. “If we changed the price every time the price of crude changed, people would go crazy.”

The competition


Timmons said if an area has a lot of competition, customers end up with higher supply and lower prices.

Andrew agreed.

“Competition is important. Are there any other stations nearby? If not, they can charge a little more,” Andrew said.

That means a retailer like Sheetz can charge a different price at different locations in the same town or in nearby communities.

Andrew said Sheetz, which has more than 400 locations in six states, appears to have a hold on the local market. He noted that the corporation puts a lot of effort into selling food, where profits are higher.

“I would think they would want to keep their prices low enough to get people to come in and buy their food and drink their coffee,” he said. “They make more profit off of coffee than gasoline.”

Timmons added that he believes that Sheetz has the ability to set prices, because it doesn’t have a viable competitor in this area.

“There are few businesses that can compete with Sheetz,” he said. “That contributes to the higher price we pay here, compared to Harrisburg and Philadelphia.”

Lorenz disagreed, saying Sheetz does not control prices in the local market. Sheetz gasoline sold in Altoona, Tyrone and State College – which is often priced differently – all comes from a terminal in Duncansville.

“It [the price] depends on the competition. If the product is coming from Altoona, it would be more costly to get it to Tyrone and State College. The cost of transportation may be outweighed by the competition,” Lorenz said. “State College charging less makes no sense. It is purely competition.”

Martin Oil Co., which owns 11 gasoline locations in the area and operates 10 more such as Reighard’s Gas Station in Altoona, is a local competitor of Sheetz. Sheetz and a Martin’s General Store sit across the street from each other at the Bellwood interchange of Interstate 99.

“The bottom line is all competition plays a role and they [Sheetz] just happen to be the largest competitor in the area,” said Martin Oil General Manager Janice Martin. “We match them whenever we can. The smaller the company, the harder it is to do.”

Get Go from Giant Eagle, which has locations in Altoona, Roaring Spring, East Freedom and Ebensburg, has a station a stone’s throw from a Sheetz store on Pleasant Valley Boulevard.

“We price fuel competitively in each of our local markets, and consider multiple factors such as consumer demographic information and proximity to other area fuel stations,” spokesman Dick Roberts said.

Representatives of Turkey Hill, which has locations in East Freedom and Roaring Spring; Snappy’s Convenience Stores, which have several locations throughout the area; and BP Oil, which competed in the Altoona area with Sheetz for several years, did not wish to comment for this story.

Wayne Evans of Altoona, who travels frequently between Altoona and Washington, D.C., said he is frustrated by the gasoline pricing.

“I believe Sheetz is the leader of the band. No one wants to take them on. They dictate the price of gas and everyone else follows them. They are always the first to go up. That has always been an issue for me. I think we are getting ripped off on a regular basis,” Evans said.

Unforeseen events

Lenard said years ago the price of gasoline was more related to supply and demand than it is today. He said now what affects the price is “potential supplies” or “what if” situations.

For example, when there was unrest in Egypt, there was a concern what would happen if that spread to the Middle East. He said now there are concerns about Iran.

“The ‘what if’ scenarios push up the price,” Lenard said.

Good economic news, such as the country coming out of the recession, the creation of more jobs or an increase in housing starts, also can put more pressure on oil prices, causing them to go up.

“The consumer loses both ways. Oil prices are not directly related to reality any more,” Lenard said.

Weather and world events also play a role in the price of gasoline.

A catastrophic event like Superstorm Sandy that blocks transportation and disrupts supplies typically causes the price to rise. The same would be true if a storm like Hurricane Katrina ends up shutting down the refineries. If that happens, you expect prices to rise, Timmons said.

Looking ahead

Andrew predicted the United States will eventually become self-dependent for its gasoline.

“What I find intriguing is because of shale oil, the U.S. will eventually be more self-dependent for oil. Over the next 10 to 15 years, we will become a net exporter of oil. We will be less dependent on the Middle East for oil,” Andrew said. “By 2030, the U.S. will provide two-thirds or three-quarters of its own oil and gasoline.”

Mirror Staff Writer Walt Frank is at 946-7467.