Why is gas so cheap?

[herb fellows]

actually I've heard many times over that gasoline stations are pretty low margin operations where gasoline itself is concerned, netting only a few cents per gallon, that's why historically they have been combined with either a garage or a mini-food mart/conveninence store. Most have to sell quite a large volume of gasoline.

It is a maxim in the gas station business that your gas sales should pay your rent. All other expenses, cdb (cost of doing business), salaries and profit must come from somewhere else.

[Gator95]

Some oil is undoubtedly being purchases for well under $140 because it is hard to refine. However, it's unlikely the production business inside the major oil companies sells crude to the refining side of the business for less than market value. Nothing is impossible but if they're being economically rational, they likely book profits on production and losses on refining.

True for a vertically integrated company, but not all refiners are vertically integrated.

Most procurement contracts, at least in my industry, specify a price, a timeframe, and a maximum adjustment within that timeframe. Our company is currently being supplied with caustic soda at a rate that is well below market spot price- but we're going to be hurting when that price resets after our contract expires if that spot price stays where it is when we negotiate the new contract. Only way out of this for our suppliers is a declaration of Force Majeure. This has happened.

There is a long supply chain from the oil well to the refinery tank for non-vertically integrated suppliers. I really don't think that the oil supplier is shipping without agreement on payment, and I don't think the refinery is giving a blanket payment of spot price on arrival no matter what the price. All these terms are agreed on ahead of time.

For the vertically integrated companies with oil supply and refineries, it is in their interest to keep the refineries flowing even if it is at a 'loss' because it keeps reported crude stocks low and the spot price high.

[jackellis]

The independent refiners probably do have purchase agreements, and perhaps some of it is for multi-year terms at fixed prices or at "index minus". I own shares in Valero, the largest independent refiner, and it appears most of their crude is purchased on either the spot market or under short-term contracts.

I don't know what portion of your company's finished product cost caustic soda represents but Valero has to buy about a billion barrels of oil per year. Until the recent runup, there was always a risk to the seller for selling large volumes under long-term contracts because if the buyer defaulted (force majeure or bankruptcy), the seller might then have to resell the oil at a lower price. For the buyer, arranging credit for a billion barrels of oil per year strains the balance sheet of even the most creditworthy firms. Commodity producers typically have an incentive to lock in a fixed price for raw materials only to the extent they have fixed price contracts for the finished product, in which case there's predictability about price, volume and cash flows. If the finished product is sold mostly at spot prices, which gasoline is, then they'll buy crude at spot prices in order to avoid getting hammered if the spread between variable prices on one side and fixed prices on the other suddenly move way out of whack.

You do raise an interesting point about who takes the price risk between the time a tanker loads at the seller's end and the time it unloads at the buyer's end. For all I know, it could be those infernal speculators, who buy oil from the producer when it's loaded on the tanker and sell it to the refiner when it's unloaded, hoping all the while that the price will keep going up.