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Research Matters No. 47. What Drives Rural Fuel Prices?


Fuel prices in Alaska's small rural places are very high-and a lot of
Alaskans wonder what's keeping them so high, even though crude oil
prices were generally lower in 2009. So the state Senate Finance
Committee asked economists at the Institute of Social and Economic
Research to examine what drives fuel prices in rural Alaska. A new study
by Ginny Fay, Nick Szymoniak, and others describes the complex system
for getting fuel to remote places. They find that-contrary to what many
Alaskans believe-there's no single thing that makes prices so high.
Instead, many things add up to drive prices:

* It doesn't appear that fuel distributors operating in Western Alaska
are charging excessive prices to deliver fuel to communities.

* Fuel distributors in rural coastal areas (from Southeast to the
Aleutian Islands) are in a position to set higher prices-because they
frequently also own retail stores in communities. But a new analysis by
the Alaska Department of Law http://www.law.state.ak.us finds
distributors are not using that power to increase prices.

* Several things suddenly converged to push prices up in Western
Alaska-including crude oil prices that are still higher than several
years ago; price recovery among fuel distributors, after earlier
competition pushed prices below sustainable levels; the need for
distributors to replace aging equipment and acquire double-hulled
tankers; and construction of new tank farms in many communities.

* After accounting for those factors, most of the remaining variation in
retail fuel prices in Western Alaska seems to result from differences in
price-setting practices at the community level. Those include
differences in collections for operating and maintaining local tank
farms; levels of local compliance with safety and environmental
requirements for storing fuel; debt payment on bulk fuel loans; and
price mark-ups to collect revenues for other community purposes.

Components of Alaska Fuel Costs: An Analysis of the Market Factors and
Characteristics that Influence Rural Fuel Prices

Full Report


If you have questions, get in touch with Ginny Fay
(afgff@uaa.alaska.edu) or 907-786-5402
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