Not too long ago I was pondering the dramatic variation in gas price between and even within neighborhoods. There was about a quarter range just within a couple of miles of my home. Found this in the Post today, in case anyone is interested.
What's Driving Differences in Gas Prices?
Additives, Taxes and Demand Combine to Alter Fuel Costs Across State Lines, Neighborhoods
By Tomoeh Murakami Tse
Washington Post Staff Writer
Wednesday, August 16, 2006; D01
Frustrated motorists looking for low gasoline prices in the Washington area often know the cheapest spots. What is less clear is why prices vary so much neighborhood to neighborhood and why they have risen so much faster in some places than others.
Consider the range across the region, which has among the highest gas prices in the country.
In the District, the average price of a gallon of regular gasoline last week was $3.22. In Virginia, the average was $2.95, although motorists in much of Fairfax or Arlington counties would have been lucky to pay less than $3. In Maryland, a Potomac service station posted a price of $3.49, while one on the Eastern Shore charged $2.75. Nationally, the average price of regular gasoline fell to less than $3 for the first time since mid-July, to $2.997 a gallon, according to AAA.
Often, the distance between locations with different prices is not so great. Prices can range by as much as 25 cents a gallon between gas stations on opposite ends of a city, and often those prices vary from block to block within the same neighborhoods.
So what gives?
The reasons, say those who study the gasoline industry, are varied and often complex. Some experts cite a costly emissions-reducing additive that is used in gasoline sold in some parts of the country. Others blame varying gasoline taxes and a technique known as zone-pricing, essentially raising wholesale prices in areas that can absorb it.
And a few note that the market for setting prices, which is virtually unregulated, changes because of little more than the whims of gas station managers based on their own finances and street-level evaluation of supply and demand.
"Each of these local areas are a market in of themselves," said John Cook, director of the petroleum division of the Energy Information Administration, a statistical agency of the Energy Department. "Generally speaking, the closer the locality is to a refinery or a central distribution point, all other things being equal, the lower the price ought to be."
But things are often not so equal. A look at how prices have changed across the nation in the past year provides evidence of how turbulent they are.
Much of the Rocky Mountain region managed to get away with price increases of 60 cents or less in July compared with a year ago. The Southern California coastal region and much of the East Coast from Richmond to New England, however, have seen average prices increases of 90 cents or more, according to a Washington Post analysis of data provided by the Oil Price Information Service, a New Jersey firm that tracks energy prices.
Big gaps exist at the neighborhood level as well. In Bladensburg, for example, the average price of gas one week last month was $3.11, 86 cents higher than the same time last year. Back then, it was one of the few neighborhoods in the region offering gas at below the national average. A year later, it was among the pricier places to get gas in the region.
It's difficult to pin down exactly what caused such a surge, but about half of the stations in the Washington area are independent, unbranded dealers who analysts said are sometimes squeezed more by changing market conditions than are branded franchisees.
That is because, typically, brand-name stations like BP or Exxon have contracts to buy gasoline from oil companies, while independent stations can shop around. So when the market is stable, those with no brand loyalty can usually offer lower prices. When there is a shortage, however, they may have difficulty finding gas to sell.
"Off-brand stations usually have lower prices because they're buying on the spot market," said Severin Borenstein, director of the University of California Energy Institute. "They don't have the branded additives and they aren't financing a national advertising campaign. But when wholesale prices go up, those places get hit the most, and so you sometimes get an inversion, where non-branded gets more expensive."
Jassim Aligabi, owner of JK Gas in Bladensburg, said he can still offer better prices than his branded competitors, although the discount has narrowed considerably. Last week he sold regular gasoline at $3.04 a gallon, about 7 cents less than the Chevron and Exxon stations charged a few blocks away. Even after trimming his profit to just pennies per gallon, Aligabi said, that was less than the savings of 12 to 15 cents he often was able to offer his customers last year. But he was making up for it by selling more.
"We make it work," he said. "If we are 1 cent cheaper, people are coming. We have people coming from five miles away."
Another culprit market observers point to as a cause of different gas prices is ethanol.
The Energy Policy Act passed by Congress last summer prompted oil companies to phase in the corn-based additive in their reformulated gasoline in place of methyl tertiary-butyl ether (MTBE). Reformulated gasoline is required in parts of the country with the worst ozone air pollution, mainly large cities and their suburbs in California and the Northeast, including the District. MTBE which was found to contaminate ground water.
While reformulated gas has traditionally been more expensive than conventional gas, analysts said, the price differential has been amplified because ethanol prices shot up earlier this year with the sudden increase in demand.
That could help explain why gas prices drop noticeably when metro drivers head into Fauquier or Clarke counties in Virginia, or Maryland's Eastern Shore, which are just outside of the reformulated gasoline zone.
"Ethanol rose to $4.75 cents a gallon. A year ago, MTBE was going for $2 a gallon," said Philip K. Verleger Jr., a Colorado-based oil consultant. "That's 30 or 35 cents a gallon right there."
Analysts differ on just how much of the price increase was caused by ethanol; some say it was pennies, others say it was much more. Ethanol prices have receded recently as more plants have come online.
State taxes on gas also lead to price variations at the pump, and how fast prices rise.
For starters, every state has a set excise tax -- in Maryland it is 23.5 cents per gallon of regular gasoline; in the District, it is 20 cents. Some states have additional taxes, and their structure has the effect of amplifying the disparities. For example, in Virginia, the excise tax is 17.5 cents per gallon, but there is also a 2 percent sales tax in locations that are part of a Northern Virginia Transportation District.
Thus, when gas was $2 a gallon, Northern Virginians were taxed 4 cents more per gallon than those who pump gas elsewhere in the state. Now, with $3 gas, they must pay 6 cents more (If that sounds bad, consider that drivers in Georgia pay a 4 percent sales tax and those in Illinois pay 6.25 percent).
Consumers in states with certain markup laws are similarly affected. In Wisconsin, where average gas prices have risen faster than in neighboring states in the past year, wholesalers who buy gas from refiners are required add on a 3 percent markup. Gas stations must add 6 percent more.
But what about price differences at the local level?
For that, many point the finger at a long-standing and controversial industry practice called zone pricing, in which oil companies charge different prices for the same gasoline to dealers in different neighborhoods. It is unclear where the zones lie in Washington, but several station managers in Prince George's County said they were getting a better price than their peers in more affluent Montgomery County, while one gas station owner in Vienna said he is charged more than another station in the same city.
Critics say zone pricing is price gouging, and want it banned.
"It's practically impossible to compete when you have that big a variance," said Michael J. Fox, executive director of Gasoline & Automotive Service Dealers of America Inc. Fox said he sold his station in Connecticut six years ago in part because of the practice. "Before, it was pennies. Today we are talking about differences of 30 to a documented 40 cents a gallon."
Others say that getting rid of zone pricing would simply shift profits from oil companies to dealers, and would not change what consumers pay. They defend the practice as similar to what occurs in the real estate market where the same house would be sold for a different price in a different location.
"What zone pricing represents is an attempt by the wholesalers to capture some of the profits that might otherwise have gone to the more well-located outlets," said Jerry Taylor, a senior fellow at the Cato Institute, which advocates free-market policies.
With all these economic and corporate forces at work, can drivers do anything to influence what they pay?
Borenstein, of the University of California Energy Institute, thinks so. The answer? Comparison shop.
Historically, as incomes grew and gasoline became a smaller part of the household budget, motorists became less likely to drive across the street for gas that is a few pennies cheaper, Borenstein said. That, in turn, has lead to further price disparities. "What keeps all that under control," he said, "is shopping."
© 2006 The Washington Post Company |
