State attorneys will meet today to determine if gasoline prices should be capped under a new law that prevents excessive price hikes when a state of emergency has been declared.
Emergency declarations were issued for Utah last week by Gov. Jon M. Huntsman Jr., and on Monday by President Bush. The declarations are necessary to open the door for federal aid in serving flood refugees who began to arrive from Louisiana over the weekend.
But the move can also kick in a state law that prohibits vendors from raising their prices more than 10 percent above the average price during the previous 30 days. That law was passed during the last legislative session, primarily in response to reports of price gouging in southern Utah after flooding.
Paul Murphy, spokesman for the Utah Attorney General's Office, said Sunday a review will be conducted today to determine if the new law should be enforced.
Gasoline vendors, however, say that despite soaring pump prices they are not making a lot of money on gasoline. In fact, Paul Callister, president of Salt Lake-based Premium Oil Co., makes more money from a 32-ounce fountain soft drink than a gallon of gasoline.
For many retailers, revenue margins on gasoline are razor thin, typically ranging from 10 cents to 25 cents a gallon. For Premium Oil, which owns and operates 15 service stations in Utah and Idaho, margins are even less, ranging from 8 cents to 15 cents per gallon.
That's less revenue than the 30 cents to 40 cents Premium Oil makes from the sale of a 99-cent soft drink at its convenience stores.
"We have to make double-digit margins to come out on gasoline," Callister said. "What is hurting us are the bank card fees. And as the prices go up, we get more drive-outs, people who fill up and drive away without paying. We don't get any help from the police, so we have to take a loss. We've had losses every month since January almost."
Callister said that is forcing his service stations to make customers pre-pay with a bank card. However, bank card purchases carry a 3 percent transaction fee, reducing Premium Oil's margins to roughly 6 cents per gallon.
Add to those fees competition from big-box retailers like Costco and Smith's, who, he said, sell their gasoline at a loss, and gasoline retailers, along with consumers, are feeling the squeeze.
Not that consumers are shedding tears for retailers, especially when the price of gas is practically rising as they pump it. In gas lines at the Salt Lake Costco or at an almost deserted Chevron station in Bountiful, people are complaining about the price hikes and, while they did not use terms such as "gouging," most did feel the jumps unnecessary.
"I don't think it needs to go up as much as it does, even if it does need to rise," said Jordan Sommers, who makes almost a dozen trips to fill gas tanks for the auto dealership he works for in Bountiful. When the price moves four cents between trips, "it seems a little bit ridiculous."
The problem for retailers with branded gas is that they actually have no control over the price of their gas. Instead, it is set by the wholesaler, producers like ChevronTexaco or ExxonMobil, responding to global prices, but companies also making record profits.
Blake Sanders, store manager for Slim Olsen's Chevron in Bountiful, said that they typically operate at about an 8-cent to 10-cent margin, but when prices are escalating as quickly as they are right now, it is practically impossible to maintain that margin. Even as he expected the price to break the $3 plateau it was $2.89 Monday "we will probably be selling it for what we will buy it."
According to the American Petroleum Institute, crude oil costs are the biggest component shaping the price of a gallon of gasoline, followed by state and federal taxes. Utah's state excise tax is higher than the national average. The actual refiner marketer margin is the smallest component of the price.
Some options for combatting runaway costs include a cap on gas prices, as was done in Hawaii last week, and a suspension of the state gas tax, a move taken by Georgia Gov. Sonny Perdue on Friday. A state gas-tax suspension also is being considered by political leaders in Massachusetts, Tennessee and Connecticut.
The possibilities of those types of price controls had not even been discussed by Huntsman prior to the holiday weekend, spokeswoman Tammy Kikuchi said.
The state energy office said that there is no evidence of price gouging in Utah, and that while large, the price increases are not unexpected or excessive. In fact, even without Hurricane Katrina, prices probably would have jumped because of the Labor Day weekend.
The price jumps of two or three dollars being seen in the deep South, along the Eastern Seaboard and in much of the Midwest are because of actual shortage related to the loss of refining ability and delivery systems along the Gulf Coast. In Utah, however, shortages are not expected, since 75 percent of the state's crude oil comes from Utah, Colorado, Wyoming and Montana. The remaining 25 percent comes from Alberta, Canada.
But just because Utah receives its oil from outside of the Gulf of Mexico and has its own refining capacity, the state is not immune from national price shocks, according to Lee Peacock, president of the Utah Petroleum Association.
"The trend upward is definitely a direct result of Hurricane Katrina," Peacock said. "The price of crude oil is set in international markets. We are not insulated from the price of the raw material. We can't isolate ourselves, because if our prices are substantially lower in the Intermountain West than, for example, in the Midwest, it then becomes economical to send trucks from the Midwest to terminals in the West."
While gasoline prices continue to skyrocket, Peacock said he doesn't anticipate that Utah prices will reach the same levels as those in the Midwest.
"Our supplies have not been disrupted," Peacock said, "but the trickle-down effect of people drawing fuel from outside of their traditional marketplace affects all the country."
Nick Snow, managing director of Oil Daily, said oil companies use what is called "replacement cost economics" when pricing oil products.
"If there is an interruption like Hurricane Katrina, it means that supplies may not be readily available," Snow said. "They calculate the cost of replacing those supplies and price what they have on hand at that level immediately with the idea that they are going to have to pay that cost to replace those supplies."
Utah has five refineries and is the endpoint of a major refined gasoline product pipeline from Wyoming. Combined refinery capacity of Utah's refineries is about 170,000 barrels a day, about half of the refining capacity of one refinery in the Southeast.
Ron Planting, an economist with the American Petroleum Institute, said Hurricane Katrina has forced the shutdown of seven refineries in Louisiana and Mississippi. Three separate refineries, Planting said, had been scheduled to restart operations Friday. Those 10 refineries alone, Planting said, account for about 10 percent of the nation's refining capacity.
At least 10 other refineries are running at reduced production.
Even if Hurricane Katrina had not materialized, gasoline prices were already headed above $3 per gallon, according to Peter Morici, a business professor at the University of Maryland.
"Gas prices will be above $3 for many months after the Gulf refineries are up and running," Morici said. "The crisis created by Katrina will only serve to exacerbate the consequences of rising energy prices and of other fundamental shifts in the economy U.S. manufacturing from automobiles to petrochemicals will be hurt."Comment on this story
Planting said it has been more than 25 years since a new refinery has been built in the United States. New technology, combined with expansion of existing refineries, have increased production levels.
Even so, Peacock said, the country is long overdue in building new facilities."The reason we haven't built a new refinery is because the environmental statutes have become so stringent," Peacock said. "The permitting and siting requirements are so stringent that it is not a very economical proposition.
Contributing: Zack Van Eyck