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Fuel costs are determined far from Gainesville

POSTED: April 24, 2008 5:00 a.m.

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Gainesville motorists are paying about $3.35 per gallon for gasoline, but who’s to blame?

The truth is, most local gas vendors have very little control with the price of the gasoline they sell at their stores.

Every weekday morning, Paresh Patel, owner of Freddy’s Quick Serve on Dawsonville Highway, gets a call from a jobber, a middle man in the fuel industry, who tells him the price of gasoline for that day.

"Usually, we don’t make nothing," Patel said of gasoline sales.

Most of Patel’s customers pay with credit cards, and by the time he pays fees to credit card companies — about 3 percent of the sale — Patel said his profit margin no longer exists. Patel would not think of making his customers pay in cash, because without credit cards, "they’ll not stop here."

But what determines that gasoline price every day?

With the cost of crude oil around $110 for a 42-gallon barrel, fuel already costs $2.62 before it even becomes gasoline.

"That basically is paid to the company that extracts the crude oil and takes it to the refinery," said Albert Danielsen, director of the University of Georgia’s James C. Bonbright Utilities Center. He consults on pricing matters in the oil industry. "Then, at the refinery you have some costs incurred in refining it."

Most pipelines that carry refined oil to different parts of the country come from Texas, Oklahoma or Louisiana, said Danielsen. The price of the refined oil could vary, depending on where it came from.

"If you get into California and Hawaii, the transportation costs out there and the refinery costs are substantially more," Danielsen said.

Then, federal and state motor vehicle taxes tack on a little more than a quarter to the price of the already costly refined oil, according to statistics from the U.S. Department of Energy.

"At $112 a barrel, you’re going to find gasoline for over $3 a gallon, I can guarantee it," Danielsen said.

Another player in Americans’ pain at the pump comes from the United States’ receding economy. Most of the crude oil that is refined in the United States is not domestic. About 70 percent of the crude oil that becomes gasoline in the United States comes from different countries, according to the Department of Energy.

With a weaker dollar, it takes a lot more dollars to purchase that foreign oil than it used to, Danielsen said.

"For Europeans, the price of crude oil has not gone up nearly as much as it has in the United States, because euros are buying a lot more dollars," said Danielsen. "Their crude oil component of gasoline has not gone up nearly as much."

However, there’s no doubt that the consumers, who are willing to pay the price for the commodity, are keeping the price from getting any lower.

"You always have these kind of conspiracy doctors that the companies are somehow gouging the public," Danielsen said. "The truth of the matter is its a very, very competitive industry and the prices fluctuate very substantially."

These days, demand for gasoline more than trumps the supply of the commodity.

Domestic oil production has decreased by 3.6 million barrels per day since March 1983, and continues to decline. Last month, the United States produced nearly 200,000 barrels of oil less than a year ago, according to energy statistics from the U.S. government.

On a smaller scale, when refineries are under maintenance, or a fire causes one to be shut down, the supply of gasoline can be limited in an area served by that refinery. Following Hurricane Katrina, gasoline prices spiked when one gasoline pipeline was shut down for a day, Danielsen said.

"It doesn’t take much of a supply shortage and people panicking and filling up their tanks to cause real shortages and spikes in the prices," Danielsen said.

Although domestic supply has decreased over the years, demand, for the most part, has not, and according to the Department of Energy, though motorists are purchasing slightly less gasoline than a year ago, motorists in the United States purchased more than 44.5 million gallons of gasoline in January.

"You have very inelastic demands for these products, so the price tends to be pretty volatile," Danielsen said.

But Danielsen does not think it is possible for the price of oil to stay so high for much longer.

"If anything I think there’s pressure ... on the price downward; I frankly don’t see how it can stay up there like it is now," Danielsen said.

But he’s not making any promises.

"I’ve been wrong before," Danielsen admitted.



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