Another Day, Another Dollar

Published in CSP Daily News

Another Day, Another Dollar Margins suffering as oil hits new highs

NEW ORLEANS --Crude oil rose to a record $65 a barrel on Wednesday before settling at $64.90 as refinery shutdowns and rising demand drained fuel inventories for the sixth straight week, according to a report from Bloomberg News. Gasoline and heating-oil futures also touched all-time highs.

Meanwhile, as recent corporate earnings reports show high oil prices are helping exploration and production firms make record profits, convenience store owners who sell gas say their profit margins continue to shrink. With energy experts predicting little relief [image-nocss] from high prices, some owners say they can't survive, according to a Louisiana report from The Biz Network.

The price of a regular gallon of unleaded rose to $2.26 this week in metropolitan New Orleans. The average national markup on gasoline is about 12 cents right now, but many Louisiana area stores are charging somewhere around 6 cents above wholesale cost to stay competitive, according to The Biz Network, noting that its not a large profit, and when a customer uses a major credit card like Visa to pay for gas, the credit card company takes 3% of the sale.

Whenever gasoline prices rise, we cringe, said Natalie Babin, executive director of the Louisiana Oil Marketers and Convenience Store Association, which represents owners of the state's 3,000 convenience stores. That's when our profit margins are the lowest.

Babin said steadily rising prices and increased competition from big retailers like Wal-Mart have forced dozens of owners out of business in Louisiana in the last five years. The number of companies in the association with more than one store has declined from 160 in 2000 to 103 this year.

Wholesale gasoline prices rise in conjunction with oil prices, though the effect is delayed by several days. While storeowners have to pay more for their gasoline, they're typically reluctant to raise prices at the pump immediately, Babin said. That's because the more consumers pay for gas, the less they're likely to spend on items inside the store such as snacks, soft drinks and magazines. It's the retail segment of the convenience store trade that has the best profit margins, she said, and loss of that revenue can shutter an operation. Stores also lose more money from drive-off theft when prices are high.

Kenny Retif, president of Retif Oil and Fuel Inc., said high oil prices do contribute to narrowing margins, but an even bigger factor is increased competition, particularly from giant and unbranded retailers that have more buying power. Harvey, La.-based Retif Oil owns about 25 convenience stores across metropolitan New Orleans under brand names such as Chevron and Texaco.

Retif said margins aren't just shrinking at the pump but inside the store as well. The average markup used to be 25% above wholesale cost, he told The Biz Network, but more competition has led operators to cut prices on Coca Cola and Twinkies. The margins are definitely slipping on the inside sales too.

Meanwhile, Bloomberg reports that the latest surge in crude oilcrude futures have risen 14% in three weekshighlights just how nervous the market has become to production threats. It doesn't seem to matter, analysts said, that the country has enough fuel in inventory to offset routine supply disruptions. The heightened sensitivity comes amid strong demand in the United States and China, the world's top consuming nations, where high prices have tempered rising fuel consumption only slightly.

"People talked about $60 crude slowing economies around the world," said James Cordier, president of Liberty Trading Group in Tampa, Fla. "But here in the U.S., (Federal Reserve Chairman) Alan Greenspan is telling us the economy is doing great and getting stronger. It bodes well for crude testing the $70 range."

Even so, Cordier said he has been stunned by the recent run-up in oil and gasoline prices and the apparent lack of any response from motorists. Cordier said prices at the pump might continue climbing "until consumers are crying uncle, which they're not."

Gasoline prices averaged $2.37 a gallon nationwide last week, up 49 cents from last year. Demand picked up by 1.4% from a year ago, according to government data. Gasoline supplies fell 2.1 million barrels to 203.1 million barrels last week. The rate at which refineries operated also declined.

Crude oil for September delivery surged $1.83, or 2.9%, to close at $64.90 a barrel on the New York Mercantile Exchange; futures touched $65 a barrel minutes before floor trading ended. Prices are 46% above a year ago.

Data released Wednesday by the U.S. Department of Energy show that crude oil inventories grew by 2.8 million barrels last week to 320.8 million barrels, or 10% above levels from a year ago. The supply of distillate fuel, which includes heating oil, increased by 2.6 million barrels to 129.9 million barrels, or 6% above last year.