September 2008

Gasoline 101

Author: Jim McCaffrey

Americans use about 380 million gallons of gasoline every day. Domestic refineries supply about 350 million, and the balance is imported. 2008 demand is off by 1 percent. A few refineries are increasing capacity, so the 2009 supply could be increased by about two percent—if crude is available.

Global supply/demand is tight. Competition is keen. Most of U.S. transportation is gasoline-powered, meaning that a severe oil/gasoline disruption will cause damage to the economy and military capability. WWII: rationing. Arab oil cut off 1973, 1979: oil companies ordered to allocate sales—80 percent of needs was typical. For months, 50-75 cars in line, 7 a.m. at gas stations. Katrina recently temporarily stopped 25 percent of U.S. oil production and 10-15 percent of refinery capacity. The South and Eastern Seaboard suffered supplier shortages for months. We are vulnerable.

Refineries operate on assays of specific crude oils best for their plants. The average oil barrel (42 gal.) yields 20 gallons of gasoline, 10 fuel oil, 4 kerosene, 1 heavy oil, 1 LPG (propane), and 8 other (including asphalt). Expansion during refining provides 44 gallons. Refiners realize a “crack spread,” i.e. product values less oil price—a gross margin covering costs and making profits.

Refined gasoline meets EPA quality standards for conventional, oxygenated, or reformulated fuel. South Carolinas’ gasoline is conventional for low population density and air pollution. Three grades are made: Regular 85-88 octane, Midgrade 88-90, and Premium over 90. Octane is an anti-knock measure considering engine compression ratio and gasoline ignition by compression only or by the spark plug. If by compression, your engine will knock, be subject to damage, and you’ll need higher-octane gasoline. Gasoline volatility (the ability to evaporate) is vital to efficient engine operation, so refineries adjust it by season and market altitude. Then there are additives available at the plant; but leaving the plant, all gasolines are within certain specifications, making them fungible, i.e. exchangeable. This allows companies to trade huge volumes of gasoline around the country. Exchanges may be involved in half the U.S. gasoline markets, saving consumers millions in shipping costs. Gasoline only becomes branded when the transport driver adds in the specific proprietary additive package for the desired brand at a terminal loading rack.

Over 200,000 miles of pipelines serve the U.S. An example is Colonial, a large line moving 100 million gallons of fuel daily for the Gulf Coast to 267 product terminals in the Southeast and Eastern Seaboard up to New England. South Carolina receives products piped into Spartanburg and N. Augusta, Ga. and via marine terminals at N. Charleston and Savannah.

Another product, ethanol, is being introduced at many product terminals. The government mandates that volumes reach 7.5 billion gallons/yr. by 2012. Ethanol is added by the transport driver to make a 10 percent ethanol/90 percent gasoline blend named E-10 or gasohol. It contains less energy than gasoline so that the blend typically delivers 5-10 percent lower mileage. Most vehicles can use it, but a driver might want to buy 100 percent gasoline if it’s available, especially if the street price is the same.

Of over 167,000 gas stations, 80 percent are operated by convenience store chains, 12 percent by big oil, and 8 percent by small operators. Hilton Head Island has all three. Retail gasoline price currently reflects 73 percent crude oil cost, 11 percent taxes, 10 percent refining and 6 percent distribution costs (transportation, terminals, stations). All upstream entities get their prices or taxes, while retail outlets get a share of the 6 percent left. Retail gasoline marketing has become unprofitable for many in recent years. Stations are being closed or sold. Exxon–Mobile has 2,220 losing stations for sale now.

Retailers set their own street prices based on marketing strategy, costs, and competition. While costs have driven prices up, street prices have not responded upward enough for operators to cover all costs and be profitable. Some of this weakness is due to major oil companies unloading fuel in their wholesale and retail markets because they are pressured to maintain a rate-able, flowing system of oil wells, pipelines, and refineries that must operate 24/7. They can’t shut down. Other price weakness factors include consumer sensitivity to high street prices and reluctance to buy as much as before: Demand is off. Some retailers barely survive on associated sales like such as car washes and convenience items.

Consumers get very good value in gasoline vs. some other products. For example, one gallon takes your family 20 miles, whereas a cup of designer coffee or dish of ice cream gets you nowhere. In May, gasoline prices in the U.K. were $8.42/gal, Ireland $7.43, France $7.78, Germany $8.08. We are very fortunate by comparison.

Still, there are things we should do. Tell the legislators and executives that you support a good, overall national energy policy and that they’ll keep their jobs if they do it, because it’s been ignored for decades. More energy supplies will lower prices.

Individual Gasoline Strategies

Buy Wisely
• Use the lowest octane your vehicle tolerates—least expensive.
• Charge to credit cards with rebates—if you use them.
• Don’t drive miles to save pennies—off your route is expensive.
• Ignore price surveys—old data and more miles to save pennies.
• Avoid ethanol if possible—it yields poorer MPG.
• Buy in the a.m.—before the price goes up again.
• Buy in S.C.—why go to Georgia and pay 28 cents/gal tax for their roads? (S.C. 16.8 cents).
• Buy brand product—better additives than some cheap gas.

Change Your Habits
• Slow down—high speed lowers mpg.
• Avoid fast starts, hard breaking and idling—wastes gas.
• Use cruise control only in flat terrain—hills lower mpg.
• Leave gas hog home—use alternate vehicle, carpool, mass transit.
• Use overdrive—engine loafs and saves gas.
• Moderate A/C use—open windows at speed are a drag.
• Plan trips—consolidate local errands; shortest route for long trips.
• Investigate hypermiling—if you are an excellent driver and want to try advanced methods to save gas. For more information, visit www.hypermiling.com.

Improve Your Vehicle
• Follow the recommended maintenance schedule—tune-ups, tire pressure, clean filters.
• Use the right motor oil—wrong weight reduces mpg.
• Use fuel system cleaner—one can (each oil change) in gas helps mpg.
• Sleek it down—remove top carriers; keep it clean and polished.
• Lighten it up—an extra 100 lbs. can lower mpg. two percent.
• Buy a fuel-efficient vehicle—if you drive a lot and economics justify.

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