Gas prices volatile, too

By Thomas V. Bona

BusinessRockford.com

When gas prices jump, the Better Business Bureau gets calls.

“When it’s $2.47 at 10 in the morning and at 3 in the afternoon it’s 2.67 they ask, ‘Why is that?’ ” said Dennis Horton, director of the group’s regional office. “They tend to believe that it is gouging.”

But gouging is hard to define. For most people it’s a case of “I know it when I see it.” From a legal point of view, it usually only comes into play during special circumstances. After Hurricane Katrina threatened Gulf Coast refineries, Illinois officials investigated claims of gouging here. Bills before Congress define gouging as “unconscionably excessive” increases during an “energy emergency” declared by the president.

Meanwhile, industry officials say that what consumers call “gouging” is just the free market at work. They say retailers set prices based on a mix of factors, including what they paid for it, what it costs to run their station, the future supply forecast, taxes and what the competition is doing.

“Anybody who tells you the government can run this better has been drinking the gasoline,” said David Sykuta, executive director of the Illinois Petroleum Council. “It’s supply and demand, and it’s by far the best deal for consumers and by far the best way to price product.”

Here’s a look at some key issues that affect gas prices in the Rock River Valley.

Are gas prices higher in Rockford than elsewhere?

Depends on what you’re comparing us with. Late last week, Rockford ranked 96th out of 278 metro areas in the country surveyed in AAA’sfuelgaugereport.com. Even compared with other parts of the state, Rockford jumps around. A year ago, we had the seventh-highest prices in Illinois, a month ago we were fifth, Thursday we were third and Friday we were fourth.

Meanwhile, every met­-ro area in Wisconsin has more expensive gas than Rockford now, but a month ago, only Milwaukee and Green Bay’s prices were higher.

It is true that Rockford’s prices tend to be higher than those in smaller cities and towns nearby. Part of that is because of taxes. Rockford has a higher sales tax rate than the rest Winnebago County, which in turn has a higher rate than Boone County.

More importantly, gas stations in smaller communities may be cheaper to operate, with the cost of land and other factors being less than in nearby bigger cities.

“You can liken it to how much a house costs in both of those areas, there’s probably a price differential in areas,” said Linda Casey, spokeswoman for Marathon Petroleum.

Why are gas prices so volatile?

Prices are volatile for several reasons. One is that demand continues to rise — Sykuta said Americans used more gas in July than any month before — while refineries struggle to keep up.

That puts gasoline inventories below where they should be. Every hiccup such as a hurricane or refinery outage sends prices up as people at every step of the supply chain scramble to ensure they have enough.

Gasoline prices, adjusted for inflation, hit a record high in May during a spate of refinery problems but have since dropped. This week’s worries over Hurricane Dean sent prices back up a bit.

When there are such “crises,” Sykuta said, the unbranded independent operators see their supply prices shoot up. Distribution terminals ration what they have for the branded stations they have contracts with. Then, independent operators go on the “spot market,” where Sykuta says prices are higher during those times.

Another factor is competition. More companies than ever are selling gasoline, from Shell to Wal-Mart to independent unbranded operators, Sykuta said.

For every 2 or 3 cents a gallon a retailer sells gas higher than competitors, it loses 10 percent of its business, Sykuta said. That’s why prices rise or fall seem­-ingly all at once — retailers “self police” themselves to ensure they’re staying in the same range as the market, he said.

Residents often complain that gas stations are colluding with each other to keep prices high, and they cite the quick changes as proof.

Casey said gas stations do monitor each others’ prices by driving around several times a day. Independent operators set prices on their own, while chains such as Speedway set prices from the corporate level based on local information.

When giant retailers like Wal-Mart and Costco started selling gas, Casey said, they became a different kind of competitor for other gas stations. They tend to charge less for gas, using it as a “loss leader” to get people to come to the store and buy other things.

In turn, other gasoline retailers nearby have to lower their prices and sell other things to make up the loss in gas profits.

“A lot of times, if it appears a price is considerably lower than other stores in the area, the chances are there’s a big box in the area,” Casey said.

Data on the state’s gas- price-monitoring Web site shows the amount of money retailers make on a gallon of gas has dropped since 2001, even as overall prices rose.

But still retailers get the brunt of the criticism, Sykuta feels.

“The difference is, in our business prices actually go down while anywhere else they go up,” he said. “It’s American to make a profit until you’re talking about gasoline.”

Is Illinois particularly volatile?

It wasn’t until recently. According to AAA’s fuelgaugereport.com, Illinois’ state average for gas prices was close to the national average and closely mirrored its ups and downs. This spring, though, Illinois prices rose more sharply than most of the rest of the country, and at one point in May, were more than 20 cents higher than the national average. It’s is now about 16 cents.

Sykuta said it’s partly because of taxes. Although Illinois’ flat gas tax is lower than some other states, it also allows local and state sales taxes to be charged on gas prices. Those taxes, ranging from 6.25 percent Downstate to 9 percent in Chicago, mean the higher gas prices get, the bigger the discrepancy with the national average is.

There are also infrastructure issues. According to the Illinois state gas price monitoring Web site, states farther away from the major refineries on the Gulf Coast tend to have higher prices. Even though Illinois has four refineries, and there are others in neighboring states, we get our supply from many places.

Still, disruptions in regional refineries — such as the BP’s major one in Whiting, Ind., — have a big effect on the area.

Another factor, Sykuta said, is that the region’s refineries have to make several types of gasoline to serve high-pollution areas like Chicago and St. Louis. That dilutes the refineries’ ability to make enough of any one type during tight times.

“If anything goes wrong, we can run short here faster than some place that doesn’t have to stock all those different types of gasoline,” Sykuta said.

Staff writer Thomas V. Bona may be contacted at 815-987-1343 or tbona@rrstar.com.

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