Stormy politics, weather add to jump at pump

seattletimes.nwsource.com Thursday, February 27, 2003 - 12:00 a.m. Pacific By Luke Timmerman Seattle Times business reporter

Why have gas prices jumped so quickly? Part of it is the threat of war in an oil producer like Iraq, a general strike in oil-rich Venezuela, and the East Coast's harsh winter, which is burning up heating oil.

But another part of the story is the way the gas business is dominated by a few big oil companies. In Washington, a series of mergers has left just four oil giants largely in control of refining, transportation and retail sale of gasoline.

Those companies control gas prices through large numbers of corporate-owned stations with secret neighborhood-by-neighborhood pricing formulas. Prices can be dramatically different from one location to another largely because the owners have decided they can charge more.

Nevertheless, as Puget Sound and the nation begin to see $2-a-gallon gas, the underlying cause is a nationwide shortage of crude oil.

The Energy Department yesterday announced that U.S. oil inventories have fallen to 271.9 million barrels — 50 million barrels, or about 16 percent, less than a year ago. That sent crude-oil prices, which were $19 a barrel a year ago, to nearly $38, a 12-year high.

In Venezuela, a long strike by the state-owned oil producer has just ended, but it will take months for production to return to normal. Meanwhile, the East Coast cold wave has consumed more heating oil, leaving less refinery capacity and crude oil to make gasoline.

It could get worse — a lot worse.

"The supply situation in the U.S. and parts of Asia is very, very dangerous," said Tetsu Emori, a commodity strategist at Mitsui Bussan Futures Ltd. "It's easy for crude-oil prices to reach $45 to $50" per barrel if a war starts in Iraq.

Ron Planting, an analyst with the American Petroleum Institute, an oil-industry trade group, said gas prices historically tend to rise rapidly following a rise in crude prices, even though today's gas was made from yesterday's less-expensive crude oil.

"Uncertain supplies from Iraq's neighbors in the future make current supplies more valuable," Planting said.

Ironically, when prices go up, local gas-station operators often get squeezed worse than consumers.

Tim Hamilton, executive director of AUTO, a trade group of 500 gas-station dealers in Washington, said the big oil companies set wholesale prices that usually leave margins of 8 cents to 11 cents per gallon for local operators to pay labor costs, taxes, utilities and other expenses, and keep whatever is left for profit.

But when pump prices shoot up, consumers tend to shop around more aggressively for cheaper prices. That forces stations to make sure their prices aren't the first to go up, which squeezes their margins down to 7 cents or 8 cents per gallon, Hamilton said.

For a typical station operator, that can mean $2,500 per month less to pay the bills, raising the pressure to make money on Twinkies or other convenience items, he said.

That situation arises at a time when station operators are already frustrated by the oil companies' zone pricing system, in which stations are charged different wholesale prices through a secret formula that appears to factor in location, affluence, proximity of competitors and customers' willingness to pay.

It's the system that explains why gas can cost so much more on Seattle's Queen Anne Hill than in Issaquah. Court challenges have allowed the practice to stand, as long as oil companies don't collude to set zone prices.

Hamilton said his members are worried that the stars are aligned for gas prices to possibly go as high as $2.50 a gallon or more this summer. This latest round of short supplies comes on the verge of springtime, when people traditionally get out of the house and drive more, boosting demand for gas.

In addition, with California's prices averaging 20 cents higher than here, oil companies might ship gasoline south to fetch the higher price — which could drive up our cost, Hamilton said.

Plus, when refineries try to catch up and replenish supplies in the spring, they often run at full speed, sometimes leading to accidents such as fires or explosions. That's just another factor that could constrain supplies and further drive up prices.

Luke Timmerman: ltimmerman@seattletimes.com or 206-515-5644. Bloomberg News contributed to this report.