Working group seeks options to alleviate strain from fuel prices
Cheyenne – On July 8, Gov. Mark Gordon and the Gas and Diesel Price Working Group released the agenda for its public meeting on July 15. The mission included “examining a wide range of options and seek out any relief that will reduce the price at the pump of gasoline, diesel and other related products resulting in higher fuel prices in the state.”
The working group includes 10 individuals from the Wyoming legislature, state agencies and industry groups and is chaired by Wyoming Department of Revenue Director Brenda Henson.
“The governor’s directions were very clear. When he organized this working group, he wanted to make sure everything from the well to the pump was investigated, prior to taking any actions,” Henson said. “Until we understand every component included in the price at the pump, how could we ever think any changes could impact the price at the pump? So, our mission today is to gather as much information as possible and understand what the consequence is to any change before we make our report to the governor.”
The working group intends to report to Gordon in August, following the public meeting on July 15 and a second public meeting on July 22.
Supply and demand issues
John Dooley of Dooley Oil and Steve Cure of Triple C Enterprises provided a wide overview of factors impacting the price of fuel, including geopolitical factors, domestic politics and energy investments at the July 15 meeting.
War with Russia and Ukraine, a resurgence of COVID-19 in China, Organization of the Petroleum Exporting Countries (OPEC) production levels and European sanctions have all placed pressure and uncertainty on prices. In particular, bans by Europe on Russian oil has removed product from the market, and lack of clarity about whether OPEC will boost production to offset those losses creates uncertainty.
“Domestic politics affect the price of fuel and crude oil. Government spending and inflation are problems everyone knows about. Anytime we’re in an inflationary period, people leave equities and invest in commodities as an inflationary hedge. There has been increased investment in energy from hedge funds and speculation, which increases volatility,” Cure explained.
At the same time, U.S. policy has taken investment out of the energy sector, which has removed local supply.
He added, “Just in the last two years alone, we have taken over a million barrels per day of processing capacity off of the market with the closing of five refineries. We are running short of refined products.”
The closed refineries are permanently shut down. No new refineries have been built in the U.S. in the last 50 years, and the shuttered facilities were “held together with Band-Aids and duct tape,” he said.
“Domestic production has dropped. We are 100 rigs lower than prior to the COVID-19 pandemic, so U.S. production of crude oil is down,” Cure continued. “We are still importing some fuel into the U.S., and we are still exporting fuel out of the U.S.”
Price components
Cure explained the price of fuel includes several major components: the New York Mercantile Exchange (NYMEX), basis, freight, taxes and margin.
“The NYMEX is where ultra-low sulfur diesel, or diesel, and reformulated blendstock for oxygenate blending, or gasoline, is traded. This makes up the largest price of fuel and where refiners make their margins based on the crack spread between crude oil and refined products,” he noted. “Financial influences are a huge part of NYMEX right now. Most of this creates inflationary fears and risk premiums from war.”
The term basis is the difference between the price of the actual commodity and the price of the futures contract. For fuel, it is calculated by taking local rack prices and subtracting the NYMEX price for the commodity. Simply, basis attempts to define a local price.
“This is where I believe we can have the most impact on the cost of fuel,” Cure said. “Basis is a factor of local supply and demand.”
Local economic activity, as well as local inventories and distance from the source also influence basis. Source disruption and pipeline issues increase prices.
“Most of the fuel in the Rocky Mountain Region, including Denver, is brought into the region via pipelines from refineries out of the area. Almost all fuel for retain is delivered by truck to its final destination, and freight makes up a large part of that,” Cure said, noting taxes and margins are also included.
NYMEX and basis are most volatile, and Cure explained freight is relatively steady, though increasing right now. Taxes also remain largely static.
Margins for distributors are most often on a cent-per-gallon structure, rather than a percentage, meaning higher-priced gas does not mean higher margins for distributers.
“Right now, with the cost for fuel, retailers are dealing with substantially increased costs, meaning they’re carrying a lot more risk for the same margin,” Cure said. “Some distributors also have huge risk when they distribute to other parties. Rising interest costs and labor costs for retailers and distributors also impact prices.”
Notably, credit card processing fees are also a major factor for retailer margins.
Solutions to high prices from the industry
Cure noted increased supply would alleviate prices, such as investment in U.S. exploration and production and increased capacity for refineries.
“We should also explore other options for bringing fuel into the region,” he said, specifically providing the example fuel could be transported by rail car from the Gulf Coast to alleviate demand.
“Fuel demand is not going away in the short to medium term. We have 20 years of fuel demand left that we need to take care of to keep everyone in fuel,” he mentioned.
“In the U.S., over the last 30 days, retail gas and diesel prices have dropped in 46 states. There have been four states experiencing no change or increases over the same period – Wyoming, Colorado, Utah and Montana. They all increased or stayed the same because of local supply and demand figures,” Cure commented.
Dooley noted increased supply is the biggest concern.
“We need a sustained supply of fuel in Wyoming, and right now, we don’t have it,” he explained. “If the refinery in Denver goes offline, Wyoming will be in a world of hurt. The number one issue we have is the need to increase our sources for reliable fuel in Wyoming.”
Saige Zespy is a correspondent for the Wyoming Livestock Roundup. Send comments on this article to roundup@wylr.net.
