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What Really Drives Gas Prices?

by May 1, 2023Magazine, Oil & Gas

Kerry Tasker

 

At the corner of Northern Lights Boulevard and Minnesota Drive in Anchorage, three gas stations face each other: Carrs Safeway, Chevron, and Vitus. From one spot, a consumer can read the price of each station’s key product on their illuminated signs. Fuel is one of the few goods whose price is advertised so publicly, to the tenth of a cent.

“It can be the same price for a week, and then sometimes it might change three times in one day,” says Vitus Energy co-founder and CEO Mark Smith.

If the price goes up three times in a day, customers get angry. So why provoke them? “You just want to have transparency. It is the price that it is, and you need to communicate that and let them make their own decision,” Smith says. “I guess if they’re very angry, they’ll drive somewhere else.”

At Northern Lights and Minnesota, drivers don’t have to go far, and that corner is hardly the only intersection where competitors are next door. Proximity is a function of traffic flow, according to Smith. “If you’re going the wrong way, you’re probably not going to go to the opposite side of the road. You’re going to take the station on your side or wait until you’re coming back the other direction,” he says.

“Diesel drives the commercial sector almost 100 percent… I mean, everything from road equipment to all the construction equipment to the industrial equipment up on the Slope and the fishing fleet. It’s really the lifeblood of the state.”

—Patrick Mulligan
Director of Supply Chain Management
Petro Marine Services

Indeed, some drivers choose a gas station based entirely on location and ignore price entirely. “It’s a strange business. Some customers will drive across town for a better price than other people. [Or] if you’re on the correct side of the street for them on the way they happen to be going, you’re going to get the business truly as a convenience,” Smith says. “You see both types of customers.”

Vitus Energy has been distributing wholesale fuel since 2011, and the company purchased its first retail station in Dillingham in 2013. Vitus has since acquired stores in Sterling, Trapper Creek, Tok, Healy, and a couple in the Anchorage Bowl.

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Wholesale distribution is largely the same, whether by Vitus, Crowley, Inlet Energy, Sourdough Fuel, or Shoreside Petroleum, so each company distinguishes its brand through service.

In the case of Shoreside, “We’re a family-run company, you know,” says Patrick Mulligan, director of supply chain management. “It’s a smaller management team, and we like to think we’re a little bit closer to the end user and the consumers.”

Shoreside Petroleum is one arm of Petro 49, which started in 1936 as Andy’s Oil Delivery in Seward. Delivery driver Dale Lindsey bought the company in 1959. His son Kurt got into the business in 1981, purchasing Marathon Fuel Service in Seward and turning it into Shoreside Petroleum, which became a subsidiary of Petro 49 alongside Petro Marine Services.

“We’re transportation, but we’re also procurement and purchasing,” Mulligan says. “Part of my job is working with the refiners and with the upstream folks to make those purchases, and then we distribute it through our network and ultimately to the end user.”

Information Design

Candy Bars and Soda Pop

One side of the business Mulligan doesn’t oversee is Shoreside’s retail brand, Essential One. The logo appears on gas station convenience stores (“c-stores” in industry parlance) in Wasilla, Whittier, Anchor Point, Nikiski, Seward, and Bird Creek. The brand also has a toehold in the Anchorage Bowl, in a light industrial area along King Street. Essential One recently took over the Tesoro station at Arctic Boulevard and International Airport Road, half a mile from a Vitus station.

Renovating older rural stations and cautiously entering the urban market has also been Vitus’ strategy. Expansion into retail generates revenue in winter when barge deliveries are frozen at the dock. It also makes Smith, who grew up in his father’s fuel business, a merchant of burritos and energy drinks.

“We’ve had to embrace that as part of making a gas station work,” Smith says. “You have to be able to sell all these other things in order to keep them in the black. We have five liquor licenses, we sell propane, we have the suite of services you would see at normal c-stores.”

Mulligan likewise came up through wholesale distribution, scheduling fuel barges for Delta Western. When he joined the Petro 49 family in 2018, his expertise was fuel and lubricants, not food and condiments.

“Those air fresheners and candy bars and soda pop are a big profit source for a lot of gas station owners,” Mulligan says. “To a large extent, some of the gas that’s sold there isn’t their primary profit center. It’s just an excuse to get people in the store to buy that other stuff.”

General merchandise is on the shelves because the margin on fuel is so thin. “These aren’t cash cow businesses. They just aren’t,” says Smith. “And I think that’s true across the board: these gas stations, they struggle. That’s why a lot of the owner-operators, you see them leaving because it’s just a very, very tough business.”

The “1203” hazard tag indicates a tanker carrying a flammable liquid, such as any grade of gasoline. A tanker of diesel would be marked “1993.”

Kerry Tasker

Fixed Costs

Gasoline and diesel prices fluctuate with the crude oil market and refinery capacity, and not always to the advantage of gas stations. “Whether the price of oil is low or high, it’s not necessarily driving profit,” Smith says. “In fact, high prices consume more working capital, so we’re not a big fan of high prices, either.”

Smith points to the example of a Vitus gas station in the Western Alaska village of St. Michael compared to a c-store like the Speedway Express on the Seward Highway at Girdwood. The highway station might sell more fuel on a busy summer day than St. Michael might sell in a year, yet both stores have similar overhead.

“The problem is that it’s a fairly fixed-cost business,” Smith says. “Whether you have a gas station that does half a million gallons a year or one that did 2 million gallons a year, your costs are probably very similar. And since Alaska doesn’t have a lot of people, most of the gas stations up here don’t have a lot of flow through.”

While rural prices are indeed notoriously expensive, the Railbelt region is hardly an outlier, in national terms. “On any given day, you can look at the GasBuddy prices here in Southcentral and, you know, Seattle or anywhere on the West Coast, and to a large extent they’re very comparable,” Mulligan says.

Smith agrees, though he admits saying so might be provocative. “If you compare us to Hawaii or even California, Alaska has, I’m going to say, a profound discount over those two states and even Washington state on a retail level,” he says. “So we still have—relatively, all things considered—inexpensive petroleum here in Alaska.”

Economy of Scale

Contrary to what many drivers believe, most of the gasoline burned in Alaska comes from Alaska.

“The Marathon Nikiski plant has the lion’s share of the gas that’s consumed in Southcentral Alaska,” Mulligan explains. “A little bit comes into Southcentral from Anacortes, but most of what we’re looking at and what we’re buying and consuming here in this market comes out of Nikiski.”

Marathon’s Kenai Refinery in Nikiski is the only gasoline producer in Alaska. The Petro Star refineries in Valdez and North Pole make asphalt, jet fuel, marine fuel, heating fuel, and power plant turbine fuel. But for gasoline, Marathon is the go-to supplier.

The market lacks the scale for a competitor, according to Sean Clifton, a policy and program specialist with the Alaska Division of Oil and Gas. “Where any given refinery on the West Coast has millions of customers within a short delivery radius, the Kenai refinery serves less than three-quarters of a million customers,” he says. “Any competing sources of gasoline must be shipped from Canada or West Coast refineries, which is not cheap, and then faces the same distribution cost challenges once delivered to an Alaskan port.”

However, the availability of imported fuel links the Alaska refinery economy to the Lower 48. “The refiners realize that they have to be competitive with product coming out of the Northwest or overseas or whatever in order to make it work. That works to our benefit,” Mulligan explains. “Nikiski realizes that just because they’re up here in Alaska, they have to be competitive with other sources or else people are just going to say, ‘Well, why don’t I just bring this product up from Anacortes or from Asia or wherever?’ It makes Alaska part of a larger network and gives us kind of an advantage that way.”

“Whether the price of oil is low or high, it’s not necessarily driving profit… In fact, high prices consume more working capital, so we’re not a big fan of high prices, either.”

—Mark Smith
CEO
Vitus Energy

A Shoreside tanker truck at the Essential One retail station on King Street in South Anchorage, all part of one big Petro 49 fuel distribution family.

Information Design | Petro Marine

Pump Control

Another advantage Alaskans can be thankful for is the lowest gasoline tax of any state, at $0.0895 per gallon (held low partly because of high transportation costs). Federal taxes run $0.184 for gasoline, $0.244 for diesel. Altogether, taxes compose about one-seventh of the price of a gallon of gas.

Four-sevenths is dictated by the global price of crude oil. Another seventh is refining costs. That leaves one-seventh for distribution and marketing, including expenses and profit margin. Further details are hard to come by; Clifton notes that pricing is subject to non-disclosure agreements, and Smith and Mulligan both abide by them.

Safe to say, though, that the distribution component is pegged to the miles traveled from a refinery. “Anchorage residents have the benefit of a products pipeline from the refinery to the port,” says Clifton. “Everywhere else in the state sees higher prices for gasoline because the cost of trucking it is necessarily a part of the price at the pump.”

Smith confirms that trucking accounts for much of Vitus’ operating costs. “Trucking has gotten substantially more expensive in the last eighteen months. The cost of a truck is through the roof, and the cost of a driver. There’s just not enough drivers to go around, so they’ve seen substantial pay increases,” he says.

Mulligan notes that inflation has cut into Petro 49’s profits. “Every last person is making more money—the cost of all the stuff that we buy, the candy bars, the propane, and all the other things—all of those have gone up as well. So you just have a much higher price environment but the same amount of gallons flowing through that business,” Mulligan says.

“Anchorage residents have the benefit of a products pipeline from the refinery to the port… Everywhere else in the state sees higher prices for gasoline because the cost of trucking it is necessarily a part of the price at the pump.”

—Sean Clifton, Policy and Program Specialist
Alaska Division of Oil and Gas

Consumers might feel a sense of control when they choose one of the three grades of gas at the pump, but the choice is limited. To begin with, so few vehicles require mid-grade 89-octane gas that auto manufacturers are lobbying to eliminate it altogether. The US Energy Information Administration shows just 7 percent of sales are from the mid-grade button; 10-percent are 92-octane premium, and 83 percent are the regular grade, 87 octane (which refers to the fraction of long-chain hydrocarbons in the refined product).

Except, as Mulligan explains, nobody makes 87 octane. “What you call regular unleaded gasoline is actually a blend of subgrade gasoline, which is 84 octane, and a premium grade, which comes out of the refinery at 92 octane,” he says.

The biggest selling fuel grade for Vitus is diesel in Western Alaska, mainly to electric utilities. With its marine services, the company delivers gasoline and diesel to more than 100 different stops from the Arctic to the Aleutians and up the tributary rivers in between.

“Diesel drives the commercial sector almost 100 percent,” Mulligan says. “I mean, everything from road equipment to all the construction equipment to the industrial equipment up on the Slope and the fishing fleet. It’s really the lifeblood of the state.”

The tug Dale R. Lindsey, named for the former owner of Petro 49, articulates with a chartered barge at the Petro Marine dock in Ketchikan.

Judy Patrick | Petro Marine

The Southeast Alaska fuel market, unlike gas stations on the road system, is supplied mainly from refineries in Anacortes, Washington and Burnaby, British Columbia, near Vancouver.

Judy Patrick | Petro Marine

Three Markets

Alaska is a large enough state to have three different fuel markets. While the central region depends on the Kenai Refinery, Southeast Alaska is largely supplied by US-flagged barges from Marathon’s refinery in Anacortes, Washington or the Burnaby Refinery near Vancouver, British Columbia.

“Western Alaska is primarily supplied by foreign-flagged tankers out of either Korea or Japan,” Mulligan explains, and the job of fuel companies is to carry the imported product ashore. “Barges bring all of that product into their tank farms and into some of the smaller rural villages directly off of those tankers.”

Smith adds, “It’s a totally different supply chain than, say, a community on the Parks Highway where the boat piece of it is very small.” Smith grew up in Aleknagik, inland from Dillingham, and unloaded tankers for the company started by his grandfather, Smith Lighterage Company.

To this day, he’s still doing his grandfather’s job, albeit as CEO of Vitus. “We’re continuing to provide a fuel supply line for Western Alaska,” Smith says, “and we are expanding our service offering, providing a choice and expanding our footprint here in Alaska.”

Mulligan also sees the rural Alaska market as an important responsibility, given that rural communities don’t have a lot of other options. “We really work hard to be able to make sure that we’re meeting everybody’s expectations out there, that nobody’s gonna be left in the lurch or have to face any kind of hard choices or outages or anything like that. That can be just an inconvenience [in Anchorage] but it can be a matter of life and death for some of those smaller communities,” Mulligan says.

Alaska is so big that supplying fuel requires different solutions to energy and transportation needs, Mulligan adds. Even when the system works perfectly, customers might grumble, hardly realizing the effort that goes into putting fuel at convenient corner stops.

“This isn’t really something that I think we do to get our names in the headlines,” Mulligan says. “When a fuel company or when anything fuel related shows up in media, usually it’s not for a very good reason. So we kind of figured that, you know, no news is good news.”

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