News 18 Investigates: Gas Prices Part 3

LAFAYETTE, Ind. (WLFI) – The summer driving season begins later this month, with Memorial Day weekend just three weeks away.

During the first two installments of an exclusive seven-month long investigation of gas prices in Lafayette and around the viewing area, News 18 has revealed the identities of the cheapest stations, plus analyzed why the Lafayette area is by far the most volatile city in the region.

In Part 3, News 18 looks to divulge the top tips from those in the industry to save you money, debunk seven myths about gas prices and look ahead to price forecasts for the summer.

It’s a puzzle we all wish we could solve, the one at the pump.

But, it’s not easy.

While 21 price hikes over seven months of data make an average of 10 days between big jumps, it can happen in as little as five days or as long as three weeks.

According to our tracking of prices using GasBuddy, Thursday was the most common day for a large increase with six of 21 spikes. However, Saturday saw five jumps, while Monday, Tuesday and Wednesday all saw three to four jumps. Friday and Sunday didn’t have any changes.

“I can tell you, everybody I talk to about gas prices tells me you never buy gas on Fridays because that’s when it’s most expensive,” said Purdue Ag Economist Wally Tyner.

“I don’t think there’s any rhyme or reason for it other than maybe getting ready for the busiest days of Friday and Saturdays, certainly our highest volume days,” said Brian Johnson, vice president of finance for Casey’s General Store.

But among those who have studied it or are paid to know, our results may just be a fluke.

“The only thing common about when the jumps occurred was rising out of a below cost situation,” said Scot Imus, the executive director of the Indiana Petroleum Marketers & Convenience Store Association.

“As you continue to track it for a longer and longer period of time, you start to see a lot more ubiquity between those days,” said Tom Bodin, the chief financial officer for the Indiana Attorney General’s Office.

Myth #1: All gas stations are owned by big oil companies.

In reality, only about six percent of stations are, including Speedway, which is owned by Marathon. Imus estimates that out of 3,200 stations in Indiana, 200 are owned by large oil corporations. Otherwise, individual business owners buy branding rights and agree to a contract with a specific brand.

“The myth in our industry is that it’s all owned by big oil companies, but the fact of the matter is that very few retail stations anymore are owned by big oil companies. It’s people that have been in the community for years,” said Imus.

Myth #2: Indiana’s gas stations are regulated on how they set their price. In fact, they are able to change their price as many times, both up and down, as many times as they think the market as support it.

Myth #3: There’s a lot more profits per gallon for gas station owners around the holiday. Bodin told News 18 it’s more about an increased demand which forces the cost up on the fixed supply. Imus adds that sometimes gas station owners will lose money because they are less willing to lead the market by raising their price and lose their volume of customers.

Myth #4: Gas stations do better when gas is at $4 a gallon rather than $3 a gallon. Gas stations make similar margins regardless of the price of fuel. In fact, when gas prices are higher, owners are less willing to make a price jump even if wholesale prices continue to rise. Plus, when gas costs less, more consumers are willing to buy items in the convenience stores, which are where companies really make their money.

“The lower the price. Obviously, the more volume we can do, and so we’re happy when the prices are lower than when they are higher,” said Rick McClure, executive vice president of the McClure Oil Corporation, which owns 36 stations around Indiana. “Especially as prices get up close to the $4 a gallon mark, people are really paying attention to where they can get the best deal. So, the prices posted on the street are important.”

“Our business strategy doesn’t change if we’re at $3 a gallon, $4 or $5 a gallon. We’re going to continue to match the competition on gas prices,” adds Johnson.

Myth #5: All stations make roughly the same amount of money.

In reality, different stations are in different competitive markets. Casey’s has more than 1,700 stores in 14 states. Johnson said margins on stores vary between states and even vary in different pockets of states.

The competitive distance can also vary from gas station to gas station. While interstate locations typically only worry about the prices of the other stations at that exit, locations in smaller towns even have to look at the prices of other surrounding communities.

“People will either buy their gasoline where they live or where they work or somewhere in between. They’ll learn pretty quickly where they see the value of fuel prices and they’ll change their habits very quickly,” said Johnson.

Myth #6: Most of our gas comes from the Middle East.

In fact, domestic crude supplies about 60 percent of the oil the U.S. needs. Our largest source for importing oil is Canada. Tyner said only about 20 percent of our crude oil comes from the Middle East.

Myth #7: Gas prices only jump when the price of crude oil jumps.

Crude oil is the biggest driver of the cost of gas. According to the U.S. Department of Energy, using the nationwide average price in March of $3.53, with the average barrel costing $100, crude oil costs make up $2.37 per gallon or 67 percent of the price. Taxes make up 12 percent of the cost including 18.4 cents in federal taxes and 19 cents in state taxes, plus sales taxes. Refining costs and profits make up 12 percent. Distribution, marketing, retails costs and profits make up the remaining nine percent.

However, while world events and global changes in supply and demand can affect gas prices, often the reason for gas price increases is a lot closer to home.

“Regional supply and demand is on a razor’s edge. If something happens that sends either side out of kilter, that’s going to have a really big impact on the market,” said Tyner.

Over the seven months we tracked prices, the cost of crude oil on both the WTI (West Texas Intermediate) index and the Brent index has stayed relatively steady, even as gas prices have increased this spring, in part prompted as refineries went down for scheduled maintenance to switch from winter fuel blends to the summer blend.

The difference in blends is vapor pressure. The summer blend is formulated so that more gas doesn’t evaporate while drivers are at the pump during warmer temperatures.

Tyner follows a different commodity much closer called RBOB, an acronym for Reformulated Blendstock for Oxygenate Blending. Basically RBOB is a publicly traded pure gas product that is ready to blend with ethanol to turn into fuel for vehicles.

RBOB prices this week have hovered around $3.05.

Tyner estimates pump price by adding 70 cents to that number during the winter and 75 cents during the summer.

“If the local prices are considerably below that I fill up. If they are at that or above, I wait,” said Tyner.

The Attorney General’s office publishes some similar data on its website of various component prices. When the pink line representing the statewide average is at or below the green line which is the wholesale price of gas plus taxes, a jump is probably imminent. The green line doesn’t include delivery costs, profit margin or any other logistics.

Of course, you can’t use either RBOB or wholesale prices to predict perfectly because sometimes the market will correct itself before a price increase is made at the consumer level.

“Consumers’ best action is to know their market and reward those who will price the lowest,” said Bodin.

Bodin adds even if that lowest price isn’t the station you usually use or even a brand name.

“The gasoline is all the same. There can be some difference in the additives, but I haven’t seen any studies that would suggest additive x is really, really good and you ought to be willing to pay pennies more for it. There’s just no hard data on it,” said Tyner.

There are plenty of other tips you can follow to save: keep your tires properly inflated, combine multiple errands into one trip and only use the octane that’s required in your owner’s manual.

“There’s not a real good reason to go to a higher octane,” said McClure.

Other tips include taking advantage of technology, like gas price websites to monitor gas prices around where you live and work. Some places will give you a price discount, if you pay in cash or join their fuel club. Also, do not slam on the accelerator.

“You’re going to hit a high point on your fuel efficiency between 55 mph and 60 mph,” adds Bodin.

What does the summer of 2014 hold?

The U.S. government’s latest estimate calls for an average price of $3.44 until the end of the year and $3.36 next year, helped in part by declining fuel consumption.

According to the Department of Energy, annual consumption nationwide has dropped from 142 billion gallons in 2007 to 133 billion in 2012. Tyner said that is mostly due to cars which are more fuel efficient.

Tyner won’t release his summer forecast for another couple weeks, but thinks the U.S. forecast may be a little low.

“If we have a normal season of outages and lack of outages, I do think prices will be lower than last summer,” said Tyner.

That’s good news for drivers.

But, as always in this industry, it’s subject to change. Which means that when it comes to solving the pump puzzle, it’s more like an educated guess.

“I wish I had the tip because then I’d follow it too, but there really isn’t,” said Johnson.

News 18 contacted each of the 20 stations that we tracked to ask for comment. Casey’s General Store and McClure’s were the only stations willing to do an interview. We also tried to do an interview with each of the four oil refineries in the greater Chicagoland area including the BP refinery in Whiting, Ind. None agreed to do an interview during the month of April.

When we asked Johnson, McClure and Imus why the industry is secretive, they had different answers.

“For most people, it’s a lose-lose situation to talk about it because no matter where someone is from, they are determined their prices are higher than everybody else’s,” said McClure.

“It’s funny you mention secretive because we don’t feel it is from our perspective because we’re publicly traded,” said Johnson. “So, our financial statements are available for the world to see.”

“I don’t think it’s secretive at all. I would dispute that,” said Imus. “I follow and I’m sure if you talk to the Attorney General’s Office, they follow. I would argue that gas prices are the most transparent price there is out there.”

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