Gas Prices in Consumers' Hands

Published in CSP Daily News

Alon CEO offers retailers sympathy, says drive less, consider diesel

MIDLAND, Texas -- Before he even entered the ballroom at the Petroleum Club in Midland, Texas, this past week to address the Permian Basin Petroleum Association, Jeff Morris joked that he was asked at least twice a day about gasoline prices.

"The public always thinks gasoline prices are too high, but they forget that they have more control over prices than they think, said Morris, president and CEO of Alon USA, according to the Midland Reporter-Telegram. If people would drive 14,850 miles a year instead of 15,000 miles a year, gasoline would be $1.50 [image-nocss] a gallon and oil $25 a barrel."

Demand, he said, has exceeded refinery capacity growth, which has averaged 1% annually for the last 20 years. In fact, he said, the nation imports 18% of the gasoline it consumes. At current rates, he said, the nation would need new capacity equaling 16 new refineries to meet demand.

What will help, he said, is for the nation to follow Europe's lead, where 80% of all top-end vehicles use diesel fuel. Alon, owner of the Big Spring Refinery and 7-Eleven convenience stores throughout West Texas and southeastern New Mexico, just converted its refinery to produce ultra-low-sulfur diesel and is giving serious consideration to a proposal to add the ability to produce biodiesel fuel. Diesel engines are 40% more efficient and have 40% fewer greenhouse gas emissions than gasoline and are certainly more efficient than the ethanol being touted, he said.

If, he said, 2% of all Midlanders bought E85 ethanol-fueled vehicles, the nation would need 26 new refineries to meet demand. But if 2% of all Midlanders bought diesel-fueled automobiles, the nation would need only six new refineries over the next 25 years. And if some Midlanders bought hybrid-diesel cars, there would be no need for new refineries.

Demand, Morris said, has been driving the current cycle that saw prices pass the $3 level. He noted that gasoline demand this year has risen 1.1% despite high prices.

"In 2004, when prices hit $2, I thought people would quit buying gas. I was wrong, he said. In 2005, when prices hit $2.50, I thought people would quit buying gas. I was wrong. When prices hit $3 this year, I thought people would quit buying gas. I was wrong. I don't know what the price is where demand will decline; this is staggering to me. We're going through the first demand-driven cycle in 50 years and so we don't know the point where people will use less."

It troubled him, he said, that the ones who make the least money in the gasoline supply chain the retailers are the ones on the receiving end of consumer anger over high prices.

Approximately 80% to 90% of the nation's service stations, he said, are owned by independent businesses. He went on to estimate that over 50% of the profit at a convenience store comes from sales of coffee, cold drinks or Slurpees and only 5% from gasoline sales.

"The Town & Country stores are locally owned out of San Angelo. [You've got] Bill Kent here in Midland [and] Skinny's out of Abilene. These are independent business people and they reach their business decisions independently, he said. Some choose to compete with Wal-Mart and keep their prices lower. Some choose to make some money and keep their prices higher.

"So if you're in a store, don't worry about buying gas, buy some coffee instead," he said.

Alon itself has experienced tremendous growth since purchasing the Texas assets in 2000, Morris said. Among the company's future plans are construction of a $12 million signature travel center in Midland in partnership with Petro Stop, expansion of the Big Spring Refinery by 8% by 2008, to update all its convenience stores over the next three years and to produce 100% clean gas by 2010.