This Is What Actually Determines the Price of A Gallon of Gas

certainly doesn't move and just lockstep with oil. There's refining, there's regional variations, there's variations from one gas station to another literally right next door. So there's at least to me, still there's still a lot of mystery about like why the price of gas is what it is. Why does it always seem to end in ns. I've never gotten an answer to that, whether it's to ninety nine or nine or four ninety nine seems to be popular, all these things. You know, gas is so central's so central

the economy. Ever since gas started going down, prices started going up. Biden's approval ratings started ticking up when gas prices started following, and of course vice versa. The price of gas feels like it's determinant of almost everything these days in American life. And so why do we learn, like what causes the price of gasoline? So to answer all of our questions or I guess in this case, just all of my questions. I want to bring in

Patrick to Han. He has the head of petroleum analysis at gas Buddy, which is a service that provides price tracking for consumers, tells them where the different prices are at different stations around them. He's been at gas Buddy for thirteen years. He knows everything about the price of gasoline, and if you follow him on Twitter, he is always answering in a pretty direct manner what's going on with gasoline.

And when he's when prices going up, Republicans love him and talk about how terrible the White House is doing, and when the price is going down, everybody flips sides. And meanwhile he keeps it a political and just says, this is going on with gasoline, even though it's so so central to what's going on. So Patrick, thank you so much for coming on odd lots, Thanks for having me.

It's certainly always fun, you know, when prices go up or down to see the movements and watch all the politicians change sides, right, And in one minute it's great and the next it's not. That I mean that is by pressure just for watching your Twitter handle, Like you're like talking about the price of gasoline, and suddenly you see so viscerally how central gasoline is to say, American politics, by essentially like who is attacking you at any given

moment for just for just tweeting out the news. Yeah, that's that's really true. People have a problem with prices going up, and they have a problem with them then coming back down. And you know one side likes when prices go up or down. It's you know, it's become

very political. We'll just say it that way. Well, let me ask you a question that is I don't think political at all, but so it's a super basic question, but is at the core of what you do with gas, buddy, And I also think it can maybe help us like almost like work backwards and figuring out the price of gas. But if if your app essentially compares, well, what is gas at this corner station first, maybe what you could get if you drive three blocks away or ten blocks away.

It immediately raised the question like, why is guess the price of gasoline different at one station to another? Why is there variation within gas station is very close to each other? Well, and it's it's really loaded, uh and very complex. I'll try to dumb it down. But essentially, gasoline, like oil and other commodities, the prices that stations are paying will change on a daily basis. There may be

different suppliers, there's different competitors. So essentially at the station level, stations are all paying something different depending on the timing of how much they're buying, who they're buying from. And with oils so volatile this year, because of a lot of these high level factors recovered from COVID, Russia's war in Ukraine, the overall economy, the price of oil and gasoline has been gyrating violently. So one station may get a twenty five cents again less than another, and so

that goes into you know, these various hotspots. But stations also when prices have been declining as they've been for the last nine weeks, stations have incredible latitude to either lower their prices very quickly as their cost goes down, or kind of more slowly depending on if they got the timing right this year, stations may have a different financial position, that is, they may be hurting when prices went up because, as many people do not know, it's

oftentimes very hard to be the first one to pass along the price increase, so stations take it on the chim one prices go up, and when prices go down, they're in less of a hurry to lower prices, and that can some of these hotspots where there may be in a very aggressive gas station that wants to lower prices, and some others may not be so aggressive, and that can cause a lot of variety and what you're paying locally. I don't know if there is an average gasoline station.

I'm sorry, these are gonna be all very do we might just do thirty minutes of like extremely rudimentary questions about how gasoly works. So I hope that's cool, But I don't know if there is an average gas station. But to the best you can answer the question, how often do gas stations themselves get a refill and how close to the bottom of their own tanks do they get typically before a refill? Like, how do gas stations play that? Well, it depends on the size of the

gas station. Some mom and pops may simply order when they need more, whereas the pros, the companies that may own many stations may have somebody that buys fuel and looks at markets to know when to time it right. It's like an airfare, right the airfare has change on a daily basis, and if you want to fly, you're just gonna buy airfare, Whereas if you're buying a lot of airfare, you may weigh a day, a day or two. So you know, at the station level, stations are kind

of adjusting their prices looking at that. But you know, it's again going back to the volatility. It's it's been such a crazy year that not every station has that competitive advantage where somebody can just watch the price that they pay. So bigger stations that have more stores may have a leg up in terms of having, you know, somebody that may be in a position to simply watch the markets and to be able to time purchases right. But when prices have gone down, it's all very subject

to competition. How quickly prices go down, There's there's just so many things that go into it. But ultimately, now we've seen prices go down for nine weeks, and I think the most frequent thing I've been asked in the last nine weeks is why is X town you know X since per gown lower than mine? And it really has to do with just competition and whether or not there's like a status quo or if there's a wholesale club, if they're aggressive and lowering price. It certainly varies widely.

I was wondering about the competition question. If there's like a town with lots of gas stations and lots of consumer choice, can you sort of empirically show that there is more gas price volatility or maybe more aggressiveness on pricing than say a single gas station like in the middle of Death Valley, California, that no one else can you know it's your only chance to fill up for

another hundred miles. Well, it's really fascinating because oftentimes we find that the solo gas stations by themselves are generally the ones that may charge a little bit more. But there are exceptions to the rule, and it may happen more often than motorists realize that that there's an exception. I think there's a couple stations that I watch that are aggressively lowering prices, and they are all by themselves.

So I think the majority, like you said, if you're in the if you're in the middle of of of Death Valley, you have a cap of audience and prices are more likely to be above average in that situation. But there are some holdouts in the country that I can say this station is solo, but it's also bringing prices down in the majority of stations that surrounded miles away. And and why would that be, like is it what?

What would be the reason why a gas station that doesn't have a lot of competition in its proximity may still be aggressive on pricing. They may want to pull people in from a further distance away. You know, if you're if you're a couple of miles down the road, and and your station is not in the best geological location to pull traffic in people that use the gas, but at may see that you have a low price two miles down the road, and so some of those

low prices can lure people in. Economists must always be wanting, uh, they must always be trying to get your data, because I could imagine there a lot of interesting sort of like real world tests that can be seen from it about the degree to which transparency in pricing effects markets themselves, because you know, maybe like Okay, these days, you're like, oh, I will drive two miles down the road to get cheaper gas lane because the gas buddy app says I

could uh save ten cents a gallon or something like that. But at one point in the past, consumers just didn't even have that knowledge, and so perhaps pricing discrepancies or divergences could persist longer. Yeah, you know, there is a lot of market for this data potentially, you know, if not only from you know, entities that want to watch this and better understand it, but stations may you know, want to to look at their own station data and compare it to their competition as well to make sure

they have an edge. So I mean there's a heavy market for this. I mean, it's information, and you know, gas prices are so prevalently priced you can't escape them, and and so yeah, I mean I think there probably is a lot of interest from the consumer level to the business that wants to be as aggressive as possible and they want to know that their price is the lowest, right.

I think that's if anything is true of a lot of stations is they want to compete, They want to have the lowest price, and they want to make sure their prices below the competition. What about the question of margins? How much do gas stations make actually selling retail gasoline above wholesale typically? And then does it change much for

gas stations that have significant ancillary businesses. Some gas stations are literally just like a guy in a little you know, the tiny building and one pump, whereas then you have others with lots of pumps. But then there's a food court inside the gas gas station and gifts and other things like that, in which case bringing people in, maybe you lose money on the gas, but you can make a lot of money on selling drinks and stuff like that. Well,

there's a perfect example. You mentioned food for it, and I want right to it write. Some of the wholesale clubs that exist, they will take a much thinner margin. That is, they'll make five or ten cents a gallon instead of twenty cents a gallon or even you know, maybe fifteen cents to get you to the location, because what better way to get you to their store to buy fifty rolls of toilet paper or a forty eight path of your favorite drink than to get you there

with a low price. So there is absolutely difference in agenda. And some stations will have a lower price to get you to their location, whether it's a wholesale club or one of these large format gas stations that are extremely popular. You know, they'll have a whole you know, slew of of different food options. So price is a great way to get people to your location. And then as you mentioned, to go in the store where margins are higher, but

those locations they'll still make some money. It maybe five fifteen cents a gallon compared to the competition could be twenty to thirty cents. And now those margins even at the big outlets, will vary depending on what's going on you talk about, you know, the Russian invasion of Ukraine and the wholesale price of of of oil and gasoline varying. There will be times of the year, very brief times that a station could make an excess of fifty cents

a gallon. Now that's not normal, right, that is extremely abnormal. I would say that over the course of the year, a well run station will average a margin of between twenty and thirty cents a gallon, which isn't a whole lot. And keep in mind, when prices are higher, they're going to make less margin because those interchange fees, if you're using a credit or debit card, there's a cost two station owners that they don't often or all the time pass along to you. And and that fee goes up

as the price of gasoline has been higher. Wait, I hadn't even I hadn't even thought about that. So what happens the higher the nominal price of gasoline, they have to pay a higher higher check to the to the to the credit card companies. Exactly, it's very much like a commission. You know, if you sell a home that's worth a million dollars, your commission two and a half percent, a heck of a lot more so in a million

dollar home that is a hundred thousand dollar homes. So as the price of gasoline goes up, those interchange fees charged by credit card companies are taking more a bite out of the station's profit. That's really interesting. I hadn't

I hadn't thought about that, So is it true? But it is true sort of empirically that we can see that the gas stations, if they're attached to something that sells more, whether it's a large format gas station like a BUCkies that people want to go into because they have clean bathrooms and food, or a Costco or a Walmart or maybe where maybe they'll sell you like, you know,

a bunch of rolls of toilet paper as well. Those consistently have lower prices than a sort of small mom and pop or a place that sells nothing but gas exactly. Not only do they have the different agenda keep their

prices down, but they may have pricing power too. I mean, there's definitely an incentive for a finer that's producing gasoline to make a deal with a big club like a Costco or BUCkies because they're volume through, but they can help that refinery, you know, sell through more of its gasoline. So those bigger stations, those bigger format stations sell more.

They can have a lower price because the refinery may be more incentivized to make a better contract offer with them as an outlet to get rid of that fuel. Would these be national contracts that a company like Walmart or Costco or BUCkies, which is I guess sort of regional, but some sort of contract like a blanket contract that would affect all of their locations, or would be a series of contracts with regional refiners. You know, it can be both. It depends on the scope of the refiner.

If that refiner has refineries in every region where the store has outlets, it could be in every market. But oftentimes that's not the case. You may not have a shell refiner in the West Coast, but you may have a shell refinery in Texas. So sometimes it may be localized two different regions, depending on what refineries operated in a given region. I want to get to more of the sort of refining question and the degree to which

refining adds to the price of gasoline. But before we do, you know, get you you offered tweeter like, oh, the most common what is the most common price of gasoline right now? We're recording this on August, But what's the most common price of gasoline in America right now? Well, let's take a look here. As I look where three nine is the most common price across the US, and they're all ending with the nine. I mean, why is that?

And that's just like yeah, yeah, so is that just as obvious as it seems that It's like it looks better to say three than four or three forty nine than three fifty. It's like it really is, it really is? You know, no hard I'd be hard pressed to find any state and that ends in a zero, because why ending a zero three fifty, for example, it sounds a whole lot worse than three forty nine. So everyone's going to take the nine instead of the zero. And you never see a four oh one? Have you ever seen one?

I mean, I've seen a four oh one. It always has me scratching my head, like why don't you stay at four oh three and then make the jumps of three? You know, that's really funny. So that's all psychology. How much like sort of like broad regional difference is there in America depending on whether, say you're in Iowa versus somewhere, you know, in an expensive part of California. I know, I'm pretty sure gasoline is very expensive in Hawaii or it has to be uh has to be shipped in

maybe the I don't even know the word. How many like price regions are there in the US. There's five, and that's defined by an acronym PAD Petroleum Administration for Defense District, and that goes back to world War two, when we slice the country into five pieces for strategic purposes, and now those those regions define you know, there's different

supply demand aspects in each one of those regions. And to your point, each one of the regions has a different price based on the supply and demand balance in that region, and it's all defined by you may hear about the IMAX the New York Mercantile Exchange, they trade gasoline, and then under that every region trades at a different

basis to what that one overlying market is. And that basis can be minus, meaning a region could have a discount if they're well supplied and if things are running well, some regions can have a premium or a search charge

based on its supply. Is extremely tight and every region right now, as I look at it, between the highest and lowest, there's about a fifty cent a gallon difference on gasoline, while if you include the West Coast, it's even more dramatic, a seventy centigallon difference between the cheapest market, which is the Gulf Coast, and that's because there's a lot of refineries there and there's a lot of supply, and the West Coast, which is the highest is the opposite.

There's not a lot of refineries. They have special blends of gasoline in California, So even there, you're going to see a pretty wide gap between the nation's cheapest and most expensive. Because even at the basis the base level, there's a huge gap of gap between the lowest and the highest region. So what is it in the Louisiana pad right now? On what is it on the West Coast?

Like in terms of average prices, Well, you know, not taking the consideration tax or pipeline terrorists, so transportation distribution. The wholesale price in the Gulf Coast today is about two fifty seven a gallon. Now, if you throw tax and tarrasan that's where you get a lot of these states. Texas right now the state wide average three forty two.

So you're always going to see a retail price that's quite a bit higher because taxes usually slap on about sixty cents a gallon, But that to fifty seven in the Gulf Coast. In the San Francisco, the Northern California market, California is broken to northern and southern. The Northern California market, the same price of of what fuel they uses a gallon, so two fifty seven and the cheapest community the Gulf Coast and the most expensive market, which is northern California.

So the hierarchy of prices in the United States, like you start with this nymex right, is that the r bob future. That's exactly it. It's name x are Bob is the foundation and everyone will trade at a premium or a discount to that name x nmex are Bob contract. Okay, so here's another question. I am looking right now at the generic first month and imex are Bob contract. Take our XP one commodity on the terminal. Now the price is not quoted and pergune it's as to ninety is

the current price? What is that? Like? What is the basic volume unit of that contract? How many guests? How many gallons are there of those contracts? And and I'm assuming you're looking at the front month right now showing my screen this September of Yeah, looking at the specifications of that contract. You're talking about forty two thousand gallons, which is a thousand barrels. Is a contract that's kind of the basic contract. Now the CME, which the Chicago

Mercantile Exchange NIMAX as well. They've done many contracts so you don't have to bet as much, but or by as much. But that's the base contract is a thousand barrels of gasoline, which is forty two thousand gallons. Oh, I see, I'm looking at it now. I'm looking at the description of the contract. So there's forty two thousand gallons, and it looks like one contract value is actually a hundred and twenty two d and twenty six dollars for one slug of gasoling. So the hierarchy goes. There's the

NIMAX price. Then there's the five PAD regions, in which there's usually some sort of basis above that, although in theory at times if there's a lot of inventory and region that can be below. And then that's determined by various pipelines, another cause of proximity to refineries. And then and there are the state taxes. And there's one thing you left out, and it's it's even another complicating factor. Our BOB is reformulated gasoline. We call them kind of

the Bob's. It's a family. Our formulation of sea BOB is conventional blend stock for oxygen at blending. That's what BOB means blend stock for oxygen at blending, meaning that you have to add uh an oxygen it to us something like ethanol. We used to use MTB, but something like that. And so you have our BOB reformulated, Sea Bob conventional and out in California it's California are Bob. So California Air Resources Board has its own requirements, So

out in California it's car Bob CARBOB. I assume there's some lower emissions, cleaner burning that What regulates the Bob's is the r VP, the read vapor pressure, which measures volatility of fuel, how easy that fuel may or I should say, the pressure of of emissions from burning a gallon of fuel. So summer gasoline has lower r VP. That means the fuel doesn't give off as much emissions

when it's burned, so it's less volatile. And because temperatures can interact with that, you know in the in the summer months you see ozone action days, right, because the airborne temperature, the ambient temperature interacts with those emissions to create more ozone. And so lower our VP is important to clean the air up. And depending on where you are.

California has the most stringent requirements for r VP five point nine nine, whereas some of the bigger cities use seven point oh p s I r VP, and some of the conventional gasoline for summer use is nine point zero pounds or P s I r VP. So the cleaner the gasoline, the lower the r v P, and then when we move into winter the standards go up to thirteen point five and fifteen. It's kind of the

default r VP. So fift P s I in the winter, nine p s I in the summer, and the lower the r v P, the more you pay, because the cleaner burns, the components are cleaner, less voluable, and cost layer. So I'm looking right now again. I like this game of you describing something in gasoline and me trying to find a ticker for it and see if this makes sense. I'm looking at a shirt now. On the terminal it says l A five point five October carbob prompt different index.

I think it's prompt, and right now it's nine cents, So does that mean that if that sounds right, does that mean that there's a nineteen cent premium for the

California blend basically of gasoline right now. Yeah, that's that you're you're looking at the base is difference, So nine x right now is to nine if you're looking live, and the basis difference for l A is nineteen cents, so that would put the carbob price at three one and that doesn't include tax, So that you're finding the basis that's the differentiator between whether your region is paying a premium or getting a discount to that New York

Mercantile contract. Like I said, the West Coast is generally a very tight market, so it's rare to see a discount in the summer months in the West Coast, whereas it's rare to see the Gulf Coast, ever be at a premium because there's so many refineries down there that the market is generally well supplied. But if there's a major hurricane shutting those Golf Coast refineries down, you can

see a premium for Golf Coast gasoline. And by the way, all these various foundations, these basis points that encourages refineries to send gasoline to these regions. Just going to ask about that exact question, So to what degree can refineries shift the distribution of gasoline depending on where there's a premium in a different in a in a given region. Well, they can do that and discriminately where pipelines exist. Now, the West Coast is essentially cut off from the rest

of the country. Pipelines flow east to Las Vegas and west and the Phoenix, so there's a little bit of the disconnect. We always call the West Coast of Petrol Island because what's produced there stays there, and you can't easily bring material into the West Coast. It's probably faster for material to come from Japan or Singapore than it is from the Gulf Coast going down to the Panama Canal then going up the east uh, you know, up

the California coast. So well, I mean the time it takes to load a ship in the Gulf Coast go down through the Panama Canal, and keep in mind the expense of sailing through the Panama Canal because it's you know, it's expensive toll uh, and that may disadvantage your costs. But otherwise much of the rest of the country is well connected. Um, gasoline from the Gulf Coast can run up the Colonial pipeline to the east coast and it ends in Linda, New Jersey. So right now the East

coast has been extremely tight. An example, the New York Harbor market is trading at a fourteen cent premium to nomax, whereas the Gulf Coast is training at a thirty four cent discount. That set up arbitrage opens the door for for refineries in the Gulf Coast to send as much material into New York as they can because they get

more money for it. But the space on the Colonial pipeline is limited to the capacity, and right now it would not be surprising, given that pretty wide difference, that that pipeline is fully allocated, meaning it's out of the room. The Colonial pipeline that was the one that got hacked last year, right was what happened that? How did the distribution of gas move as a function of that pipeline having been shut down for a few days, Well, it didn't really move, and that was the problem. Now there's

intermediate storage containers right at the big terminals. You see those white tanks above the ground that can hold hundreds of thousands, if not millions, of gallons of fuel. I think most of the problems from the Colonial was not actually the disruption and the flow of fuel, but how motorists responded in a panic weigh to exacerbate the the you know, the disruption of fuel supplied. People went out there.

I mean we saw the photos people with plastic shopping bags filling up a plastic bag with gasoline, and so motorists overwhelmed. Even under normal times when there's not issues, they overwhelmed the system. I'm gonna throw out a percentage I think of the outages that people experience because the colonial of those outages were probably induced by how motorists responded, And five percent of the outages were probably because the stoppage of the pipeline. So it becomes down to human

behavior which exacerbated the situation. But we probably would have made it through there with limited disruptions. But you know, once once the beast was out there, in terms of once people thought that there was gonna be disruption, everyone ran for the All right, we just have a couple more minutes left and want to wrap up. But you know, refining capacity has been a really big mac road topic.

How much of a spread this sort of diminishment of refining capacity has caused, you know, on top of the price of crude oil, then it has to be refined in to gasoline. Lots of talking about early shutdown of refiner refineries, especially during when there was this collapse in

gasoline demand. How much do you think that's appreciated And in your view, how much has the constraint of refining capacity contributed to Well, really like the huge upward move that we saw beginning uh that sort of culminated in June, Well, I'd say a lot of it was due to, maybe not necessarily, you know, the lack of refining capacity. Humans trade right, all of the trades. You see, the way the markets moving is because humans are behind it, trading

based on the tangible value. And the problem is is when you start to run out of capacity, it freaks the market out because obviously, if if supply or demand exceeds supply, you know, prices are going to be on a runaway and and and so the market tends to be less measured in its response. When you start to see you know this this this territory where there's just an inability to keep up with the man, the market panics and prices start to escalate out of control because

you know, it's fear based. So people get out of control and the market goes up, up, up, up, and and so having said that, it's really important that we have spare capacity for both oil producers and refining. And by the way, that hundred and fifty dollar barrel price in two thousand eight, part of the reason why that happened is because we ran out of spare capacity. So the market just went out of control. That overheated, which inherently caused Americans and the global economy to stop using

as much. And then we finally got our spare capacity back. But this has been a story, and again it's happening now at the refinery level because of COVID and because the nation has been moving away from e v s. But I think that's a big reason why prices did get so out of control, is because of the possibility that that supply was not going to keep up with the man. But we're going to need more refinery capacity to good news is it's coming online here in the

next couple of years. Oh that's good. Alright. Final question, what is going on with demand levels right now? Because a lot of people are questioning this. E I a data which shows that somehow demand is below which makes no sense because at that point they're still tons of people not going anywhere. What's going on with demand and what's going on with that data we're getting from the EIA. Well,

and first of all, it's important to understand the methodology. Right, you don't just look at the number and say, oh this is You have to dig into what the number represents. And for the e I A, it's the best number that they can get. They measure, you know, the pipelines, the tanks that the moving of products, so there are metric is called implied demand or products supplied. Right, You're you're basically saying the markets consuming this much because we

see this much moving through these tanks. But it's not the perfect gauge because stations have intermediate storage facilities to that are not measured by the e I A. So stations could be sitting on more or less gasoline depending on the situation, right, because there's intermediate storage devices that

the EIA doesn't measure. So yes, but he actually looks at demand at the retail dispenser, and so our data doesn't line up with the I A because E A could be flawed in that maybe when prices are plummeting, stations are gonna say we're not going to buy ten thousand gallons today, We're gonna buy two thousand gallons today, and then in three days when prices are lower, and the eas data then would say there's less demand because

they don't see stations right. Stations are slowing down their purchases to get ahead of pricing differences, whereas our data continues to look at fuel dispensed at the retail station. So it's important to understand the guys methodology. There is inherent flaws. They just look at it differently. Your data does not. Your data shows robust demand. It shows healthy demand, certainly not at record levels, and now we're starting to

see demands seasonally decline. But that's where we are. It's it's not as weak as what the EI has been suggesting recently. Patrick Dehn, I've been wanting to get thirty minutes of your time for a long time to learn that you know all these rudimentary, the dumb questions about the price of gasoline, like why is it different in one place? There's no depth questions, and you know, this

is my favorite thing to do. It's just there's there's not a whole lot of solid answers out there, and there's a lot of curiosity, and that's you know, that's how I got into this too, So well, really appreciate you coming out online. My pleasure, Thanks for having it. Well,

that was really fun talking to Patrick. I wish I could banter with Tracy for a few minutes, but I did find that really helpful because A had always been really curious about things like, well, how much margin is there for a gas station, What are the advantages for a gas station that sells other stuff besides gasoline? What is the pricing power of the large chains of gasoline stations? Why is there such regional variation? So all of these questions.

Patrick answered very well. Also that e I a thing that's been getting a lot of attention because people are looking at this falling price of gasoline like, oh yeah, it's because the economy is falling off a cliff. People are driving less than they were in I don't think that's correct. Intuitively, it doesn't seem right, and as Patrick noted, the gas Buddy data does not show that kind of collapse at all. Although I guess we are past the

peak of the summer driving season. So really fun talking to Patrick and I guess we will leave it there. And this has been another episode of the odd Lot podcast. I'm Joe, wi Isn't all. You could follow me on Twitter at the Stalwart, Follow my co host Tracy Alloway at Tracy Alloway, Follow Patrick de Han at gas Buddy Guy. Follow our producer Carmen Rodriguez at Kerman Armand, and check out all of our podcasts in Bloomberg under the handle at podcasts. Thanks for listening