Most people look with amazement at the cost of gasoline and wonder why prices can fluctuate every day and almost always increase.
Actually, there are myriad reasons for the price and volatility of the global fuel market. The process begins the moment a barrel of crude oil comes out of the ground and doesn’t stop until that oil goes into a gas tank as 87 octane gasoline, said Arnold Rogers, president of Merrimac Capital.
Rogers spoke to the Rotary Club of Jacksonville on Monday.
Rogers consults on mergers and acquisitions. He also is a former gasoline station owner and operator, past president of the Florida Petroleum Marketers Association and a member of the organization’s hall of fame.
He said the first oil well was dug in 1859 in Titusville, Pa. It was only 69 feet deep and the oil that came out of the ground was used to make kerosene for lamps and streetlights.
Within 10 years, John D. Rockefeller was building refineries and America’s love for, and dependence on, petroleum products had begun, Rogers said.
Even though oil was discovered in the Middle East in 1908, America led the world in oil production until the late 1950s. Arnold said.
At the peak in 1971, the U.S. produced 9.3 million barrels of crude oil each day. Production is down to about 5.5 million barrels per day and the United States imports more than 12 million barrels of crude oil and refined petroleum products each day, he said.
Forty percent of the petroleum energy used in America generates electricity; 20 percent is used for industry, primarily manufacturing; and 11 percent is used for residential and commercial heating applications.
That leaves about 28 percent for transportation fuels including trucks, buses, trains and airplanes. Private automobiles account for 15-17 percent of the fuel consumed in America each year, said Rogers.
There are several reasons for the daily price fluctuations at the pump. It takes about two months to convert crude oil into gasoline, diesel fuel and other petroleum products and move it to the filling station, Rogers said.
What percentage of a barrel of crude oil ends up becoming gasoline is also a factor because crude oil can become any of several products, from natural gas to asphalt, depending on how it’s refined.
“It’s hard to say how much it costs to make a gallon of gasoline,” Rogers said.
Prices also are based on predictions of supply and demand as well as speculation in the commodities futures market.
“What ultimately sets the price is what somebody thinks the price will be in the future,” Rogers said.
Competition in local markets affects the price at the pump. Wholesale prices to retailers change every day and stations compete for business. A difference of only a few cents a gallon can impact sales volume as much as 30 percent.
“If a competitor goes up, you better match them or tomorrow, they’ll go down a nickel or a dime,” Rogers said.
Prices are predicted to hit as high as $5 this summer for a gallon of gasoline. Asked why European motorists pay prices of $8 or more per gallon, Arnold said European countries levy more taxes than the U.S. on fuel.
To compensate, consumer and driving habits have adapted.
“They drive smaller, more economical diesel cars,” said Rogers.
356-2466