Why are gas prices rising? Many reasons, oil executive says

By Jacob Geiger

NORFOLK

Jeff Miller knows gasoline. As president and chief executive officer of Miller Oil Co., he oversees a Norfolk business that owns more than 30 gas stations while distributing to another 60.

And gasoline is on many people’s minds these days in Hampton Roads. As the price of gasoline has shot up the past year, residents have tried carpooling, driving slower or switching to more fuel-efficient cars. On Friday, the AAA average price of gasoline here was $3.972 – about 13 cents less than the national average but $1.09 more than a year ago.

Earlier this month, we asked Miller to discuss the major factors contributing to the higher prices at the pump. Here are excerpts of his remarks:

Q. A year ago, oil was $70 to $80 a barrel, and we have been in the $130 to $140 range. What’s happened to drive up the price ?

A. There are a lot of factors, but one of the more prevalent ones right now is speculation. Since 2002, oil trades on the New York Mercantile Exchange are up 350 percent. Obviously, consumption isn’t up 350 percent, so there’s a lot more activity in the futures market.

In terms of speculation, two years back, a lot of funds started getting involved in oil trades as a hedge against inflation. That’s one of the main drivers of energy costs. So if you can get some sort of hold on where energy is going, that’s a pretty good hedge against inflation.

The other part that’s driving it that you hear about all the time is the weak dollar. How does the weak dollar impact it? First off, crude is priced in dollars, so as our dollar devalues against other currencies, it takes more dollars to buy a barrel. And so that’s part of why the price goes up.

You’ve got the strong economies in India and China that are adding to demand.

And you always have the geo-political stuff. The Iranians are shooting off missiles that can get to Israel. There’s always something going on.

Q. Even though most vehicles in the United States use gasoline, worldwide demand for diesel is growing. There also have been changes in recent years to the environmental regulations surrounding diesel. What impact has this had?

A. Basically what’s happened is there’s a premium on diesel. It used to be cheaper than gasoline and now it is running 50 to 75 cents higher than gasoline. And it’s mainly because you have worldwide demand, and it’s harder to make than it was in the past.

Part of this is around addressing environmental concerns. Part of it is the ethanol, and part of it is the low-sulfur diesel.

If you look back on the last time this happened – I think it was 1979 when the price just took off – we saw a lot of the same things happening back then that are happening now. People began to look to conserve, their buying of smaller cars, carpooling, reducing trips. The difference this time is that while gasoline demand is flopping, we’re more of a global economy right now. Diesel demand hasn’t dropped. On a worldwide basis, it’s propping up the cost of crude, which in turn is keeping up the cost of gasoline.

Q. Turning toward refining capacity, is there an issue where we’re pushing the edge of it?

A. Refining capacity is always a problem long term because you expect demand to go up long term. But now we’re seeing a reduction of gas demand in the U.S., so I don’t think refining capacity is the main issue.

Q. Overall, the big oil companies are not a big player in the retail market. What do you think is going to happen with retail over the next few years? Is it going to change where we see more people like Costco and Wawa owning stations? Is unbranded gasoline growing?

A. There’s going to be a lot of change. First off, you need to be really well-capitalized to stay in this market. I think that’s nothing new. When things are difficult, everybody has to tighten up. But usually the mid-size companies are ones that deal with pressures the most because they’re acting like a big guy but have little-guy financing.

So I think we’re going to continue to see a shakeout in the convenience store industry. There’s going to be some consolidation, but there are also going to be a lot of opportunities for smaller operators and entrepreneurs to get into the business if sites become available.

The major oil companies have difficult decisions before them now that they’re working through with distributors. They’ve got to come up with a way to keep their value proposition versus the independents, and I think they’re all working on that.

Q. You mean they have to give people incentive to stop at a Shell station, for example?

A. It’s one thing if Exxon is running an Exxon station with Exxon employees and they’re doing all the research and development and putting it out on the street. But if they’re expecting me to do that for them, I don’t have the resources. So how do you project the image that they want projected? That’s where the challenge is. How do they support distributors at the street level?

Q. Do you think the total number of stations will see a significant change, or do you think we’ll just see a change in makeup and ownership?

A. We haven’t really seen much of a decline in the number of stations over the years. It’s not too often that you see people closing them up and taking the tanks out of the ground and converting them to a bank branch or something. So I don’t expect to see a significant reduction in the number of outlets. I think some will change hands, though.

Q. If gasoline demand stays stagnant or goes down, are we going to see prices back off? Or is the confluence of factors going to keep it high?

A. It’s going to stay relatively high. I mean, I would like to see it back off a little bit. The big problem now is how the government wrestles with inflation. If they can strengthen the dollar more, we’ll see it back off a little bit. Typically you see the price dip in the fall. So if demand is off now during the peak driving time, when you get to the fall, demand could be off even more than that.

In normal times – and these are not normal times – that would translate to a reduction in price.

Jacob Geiger, (757) 446-2643, jacob.geiger@pilotonline.com