Feature Article: Drilling for diesel
This is the most easily dissected component of the price of a retail gallon of diesel fuel. The federal excise tax on diesel nationwide is 24.4 cents per gallon, and EIA’s average for the state excise taxes was in November 2009 an extra 23 cents, making up 47.4 cents per gallon of the then average $2.79 price, or 17 percent. Compared to other categories, the tax portion of a gallon of diesel in real terms is static. That’s why you’ll see the percent number there rise and fall in inverse relationship to diesel’s price itself. In the third week of January, with average diesel retail standing at around $2.92 per gallon, for instance, tax accounted for 16 percent of the price.
Tax is a primary reason diesel prices are different from state to state, with surcharges as low as 13 cents and as high as 38 cents in addition to the 24.4-cent federal tax. “I’d bet 90 percent or more of the difference” from state to state, says Rayola Dougher of the American Petroleum Institute, “is the difference in the tax base.”
In California, where API data on local, state and federal taxes puts overall diesel tax at nearly 71 cents per gallon, the January 20 average diesel price minus taxes was $2.40 a gallon according to the AAA Fuel Gauge Report; in the much lower tax state of Oklahoma (38.4 cents per gallon), the price minus taxes was $2.34, a pretty six pennies’ difference, but after all close enough to be accounted for easily in greater transport and other costs.
Truckstops often have relatively little profit on diesel
By Misty Bell
When diesel prices go up, many times the eyes of consumers turn first to truckstops. But truckstop operator Jim Hays says this blame is usually misplaced.
“Sometimes we’re selling at break-even. Sometimes we might make 2 or 3 percent,” says Hays, owner of Dodge City Travel Center, located at Exit 299 on I-65 in Dodge City, Ala. “It’s very competitive, and the margin’s typically very low.”
In Hays’ situation, he actually is the wholesaler and the retailer because his company also functions as an oil stocker. Typically, he contracts with oil companies for supply, then sells the fuel at a mark-up to retailers, including the Dodge City Travel Center. From there, Hays says, “the travel center has a mark-up to retail.”
It’s mostly a game of give and take, with wholesale pricing often changing day to day and those prices taking a few days to get to consumers. Then, at times when prices are moving rapidly, “we won’t have any [profit] margins at the pump,” Hays says. “That’s just the nature of the beast. If one of my competitors doesn’t move up, I may stay down and have a little price war. It’s all about trying to be competitive.”
Ultimately, Hays says, prices are determined by supply and demand, over which he has little control. He uses Hurricane Katrina as an example.
“You had a situation where the pipeline from Texas … was actually shut down for a number of days,” he says, causing many retailers along the Gulf Coast to run out of fuel. “The stock market or the price being auctioned on the mercantile exchange during that time skyrocketed. … The merc jumped like $2 a gallon,” Hays says. Because of the decreased supply, the prices jumped at the oil company level, which led to the increased costs being passed to consumers. “So much of the anger was directed at the retailer, but the retailer, if he was actually able to get a load of fuel, he had to pay the increased price for it.”
In the end, Hays says while he is running a business, he recognizes the importance of looking out for the people who are buying from him. “It’s not rocket science,” he says. “We just try to make a little money and pass a good deal on to our customer. Without those customers, we couldn’t stay in business.”