From 'jobbers' to the 'majors': The terms of the gas process

Dated: 5/4/07

America is a capitalist society (a philosophy which I strongly believe in) and it's not my intent to judge oil and gas companies for the profits or practices of their industry, but to lay out the facts so you may better understand how energy pricing works and draw your own conclusions.

In future columns, I will provide a summary of the week's retail prices of gasoline in our area and the approximate cost of that product. Others will cover historic and current information concerning crude oil pricing, imports vs. exports, supply and demand, refining, retail, wholesale and rack pricing, fuel taxes, additives and much more.

The goal is to provide residents of the Grand Traverse area the facts of the industry and leave the spin doctors to do their thing. I'll also provide related information about the energy industry and try to answer some of your questions.

Here are some terms I will frequently use in this column:

• Retail Prices: The price you will pay at the gas station.
• Rack: Typically refers to the loading rack where fuel is loaded for distribution at the terminals.
• Rack Prices: This is the price that jobbers will pay when buying direct from the majors.
• Jobbers: Similar to the term "distributor." Jobbers typically have the ability to purchase direct from the major oil companies, and quite often supply more than one brand of fuel. A few examples of local jobbers would be: Blarney Castle, Schmuckal Oil, Crystal Flash and others.
• Majors: Major oil companies. (Exxon-Mobil, Marathon, BP, etc.)
• Terminal: Fuel depot.
• Cost of fuel: Rack price, plus freight, plus taxes.
• Gasoline margins: Retail less cost.
• Historical pricing time line: Historically, prior to 1975, local stations typically priced as much as 25 cents per gallon higher than downstate areas such as Grand Rapids and Detroit. Since the difference in freight from Grand Rapids to Traverse City is only about 3 cents per gallon, the balance of the quarter was mostly higher profits.

Around 1975, self-service stations hit the Traverse City area and the price difference was greatly reduced to within a few cents of Grand Rapids. This resulted in a drastic reduction in gasoline profits. From this point, until just before Hurricane Katrina in the summer of 2005, gasoline margins were quite low, usually under 5 cents per gallon.

Then Katrina hit! Almost immediately rack prices shot up and local profit margins also rose dramatically, from less than 5 cents per gallon to highs of 42 cents per gallon on Aug. 31, 2005. We're talking up to 8 times the profit margins from just a few days before. (Suppliers can use creative bookkeeping to show lower margins, but I'm just passing on the actual margins and prices.)

Since Katrina, local profit margins have remained strong aside from short-term rack spikes.

Over the coming weeks I will elaborate on the above information and explain how this could happen and who really made the profits.

It's important to know that all local gas stations do not pay the same price for the gasoline that they sell. Some stations buy direct from the major oil companies and others buy their fuel from local jobbers (distributors), so profit margins can greatly differ.

Lately, the rack prices have shot up significantly, approximately 15 cents in just the last few days, leaving the local stations with reduced margins of up to 21 cents per gallon.

Thursday's rack price in Traverse City, depending on the supplier, was $2.5542 per gallon. Add in the taxes and you're at approximately $3.09 for Thursday's cost depending upon your supplier and the deal you get. The retail prices in Traverse City were approximately $3.299 per gallon.

Readers may submit questions and comments to thegasman@thegasman.info, where related stories are also available.