Unleaded Regular Gasoline

Transcription

1 Unleaded Regular Gasoline Final Report US Gas Market Ben Sheridan Prepared for AGBM 420 April 28,

2 PAGE INDEX Cover Letter: Page 1 Page Index: Page 2 Introduction and Overview: Page 3 Intertemporal Profile: Page 4-6 Spatial Profile: Page 6-9 Vertical Profile: Page Horizontal Profile: Page

3 INTRODUCTION My product profile is Regular gas prices within the United States, in over the past 30 years the price has fluctuated due to a variety of reasons. Prices are determined through a tremendous amount of factors ranging from seasonal, transportation, distance, time, or even natural disasters. The United States is now making more crude oil and gasoline than in the past, creating a change in our supply over the years. The US is also among the highest in the world with most vehicles per 1000 people (809), while on the contrary vehicles are become less gasoline dependent as ever before. OVERVIEW of PRODUCT There are many characteristics that truly affect the prices of gasoline over time, prices tend to fluctuate due to many factors. One of the biggest deciding factors of gasoline prices is the main contributor which is crude oil, as crude oils fluctuate there tends to be a correlation in gasoline prices. Crude oil can contribute up to 70% of the price according to US Energy Information Administration, and with the United States and North America producing large volumes will result in lower prices. Taxes associated with commodities and various products can cause a price to rise or drop, traditionally tax prices tend to have an impact on prices for gasoline across the board. The higher the tax rate is for a certain product, usually the lower the supply will be for that product and vise versa for a lower tax rate. The federal tax rate has been 18.4 cents per gallon for nearly 20 years, but states, counties and cities can have additional taxes to contribute to the prices. Seasonality tends to have a drastic impact on the price of gasoline due to a variety of reasons ranging from natural disasters and other weather to the different variation of gases they use in seasons. Weather is an important factor affecting prices for all commodities, whether it be a significant summer storm impacting areas of supply or the opposite in which a large storm could cause in influx in demand for gasoline and oil products. Gasoline is also different in the summer as opposed to the winter, in the summer they use a different blend to create less smog but is more expensive then the cheaper winter version. The demand for a product is always a characteristic of the defined price. As previously stated, the United States is currently among the highest in most vehicles per capita but they are also the second highest country with total number of motor vehicles. As the amount of cars on the road increase, so will the demand for gasoline to allow them to operate. On the contrary, car companies are looking for more alternatives to gasoline which may mean we have reached our peak in gasoline demand. Natural gas and electronic options for alternative energy are among the top options both for their sustainability and more affordable pricing. 3

4 INTERTEMPORAL PROFILE OVERVIEW of PRICES 1) As you can see in these two charts, US interest rates and gas prices tend to have a correlation between them. Looking at around 1990 s for the interest rates, you can see that it has peaked around 1980 and is on the decline. Along the same time is around when the prices for gasoline started to sky rocket, reaching between 3 and 4 dollars. Looking at recent times, the interest rates continued to drop low but prices are also doing the same, this could be due to a variety of reasons like alternative forms of energy and supply issues. Figure 1. US Longer Term Interest Rates over 40 Years Figure 2. Gas Prices in the U.S. provided by EIA.Gov Gas Prices Prices Year 4

5 2) The inventory levels greatly affect the prices of a certain commodity or product, for example as the demand for Natural Gas increases, the inventory for regular gas decreases. As the more demand for gas increases, the price for regular gas increases as well, less inventory or supply with a high demand will cause an increase in price. The more inventory available the cheaper it will be in the long run, but as inventory levels diminish it will have a negative correlation. Figure 3. Natural Gas Consumption In the US U.S. Natural Gas Demand Over Time Millions Cubic Feet Year 3)As stated in the previous problem, natural gas is among the top candidates for an alternative form of energy to replace gasoline. If Natural gas consumption starts to increase you can see that so does the price of regular gasoline. As regular gasoline demand decreases and supply stays constant you will see a drop in price for gasoline. If demand for gasoline decreases and supply decreases you will see a drastic increase in the price for gasoline. Crude oil pricing which is a major ingredient in creating gasoline, if crude oil prices continue to drop they will continue to create gasoline for a lower price. 4) Comparing gas prices between Canada and the United States you can see there is clearly an arbitrage relationship between the two. They both have their own set of suppliers and tax regulations that create the prices, but their demand is quite different allowing a different price. The prices in the United States are cheaper compared to the Canadian prices, as you can tell by the chart its almost nearly half the price at some points. Recently, Canadian prices are about where we were almost 2 years ago, currently at $3.13 while the united states is down below 2$. 5

6 Figure 4. Comparison of US vs Canadian Prices Spatial Introduction I have chosen my home market as the United States of America for my product of unleaded gasoline. I chose gasoline due to its great impact on the global economy and tends to have a direct impact of the success and prosperity of a country. Gasoline prices fluctuate across the world due to a variety of reasons including space, government involvement, supply and demand. Prices can be greatly affected during different seasons, while half the world enjoys summer the other half is drudging through a rough winter. Prices in the spring tend to raise due to refineries doing maintenance during this time, then the demand spikes during the summer months. The direct reason for low gas prices is through the low prices of crude oil, about 46% of American gas prices comes from crude oil prices the rest come from taxes, transportation and processing. The U.S. has increased its oil production which has caused the low prices within the county, prices of oil and auto fuel are related to supply and demand of the country. Countries around the world are causing the prices to fluctuate as well, Middle East countries are a lot less reliable and uncertainty is causing other countries to step up to the plate. Other countries in North America are receiving cheaper gas and oil as well, Canada s supply cannot keep up with demand so they have been seeking aid from the United States but with a weak currency it causes their prices to be high. The main spatial difference between countries is through taxes and government subsidies. High taxes through a country will causes high gas prices, local and state taxes also must be considered. Transportation costs between the countries allow for prices to fluctuate, depending on the mode of transportation can cause different prices. If the demand is lower and they cannot transport as much in bulk as another country they will be affected by higher prices 6

7 Overview The United States imported about 9 million barrels a day of petroleum from about 75 countries, petroleum included crude oil, natural gas, refinery gas and gasoline. Our top 5 sources back in 2014 were Canada, Saudi Arabia, Mexico, Venezuela and Iraq, 2 of our top 5 countries were within our continent causing a spatial arbitrage. Figure 5. Gasoline Suppliers across the Globe Top 5 Countries for Gasoline Gross Imports (37%) 1.17 (13%) 0.84 (9%) 0.79 (9%) 0.37 (4%) Canada Saudi Arabia Mexico Venezuela Iraq Country Exports Net imports The United States imports about $220 billion worth of oil but also exports about $180 billion worth of oil due to a variety of reasons including grades of oil, arbitrage, and supply and demand. Depending on the processing equipment within a country has a great impact on what they can process, the United States has the top tier equipment that can process the cheapest oil into usable products. This allows us to process low quality oil into premium oil and ship it to countries that don t have the capabilities to do likewise. Locations within the countries also have an effect on our imports and exports, locations such as Boston do not have direct connection to oil refineries and pipelines across the country like Texas has the capabilities to. Texas can also have access to the Gulf of Mexico which allows it to transport imports and exports with ease. The United States like most other countries, brings in politics into their trading and execution. If a country were to end relations with an enemy of the United States we may return the favor with cheaper costs. The United States has a large surplus of light oil resources allowing distribution to many refineries within the US that can accommodate. Countries like Iran that have vast supply of oil must import gasoline from across the world due to their old refineries are not able to keep up with the demand. Iran has had prices for gasoline as low as 12 cents per gallon allowing spatial arbitrage to neighboring countries. The United States imports continue to grow while gas consumption and car purchases are decreasing as well as gas per mile is increasing but countries like India and China are quite the opposite. The United States imports nearly 40% of the oil it uses and the other percent is from within the United States. Half the imports is from North and South America and less than a quarter comes from the Middle East. 7

8 Figure 6. Top Ten Annual Net oil Importers in 2014 Tax deductions and lessened restrictions could have great impacts on revenues of these companies. Free trade to me allows the world to become more connected as one, with spatial arbitrage there is also an argument of why it shouldn t happen. Unless the world become one and had a universal currency I don t think gasoline could be used with free trade due to the complexity in not only its process but of how it can effect a country s overall being. The government in some countries have subsidies on products which makes their domestic prices low and it does not fluctuate as it would. The prices of oil is in dollars across the world but as the dollar becomes weak, other countries become stronger. If the American dollar becomes weak, other countries purchase more which increases demand. I have found that there a few factors that can affect a price of oil for a country. Slow economic growth for importing countries can cause a decrease in exports for other countries. Oil importing countries can be affected by increased oil prices that trickle through the global economy. Exchange rate increase for oil increases prices for all other expenses across the board. The law of one prices is when a product is the same prices across the world. A product like gasoline almost cannot be a set price globally due to a variety of reasons. Each oil product is not the same so it must be refined to proper grade and quality in order to be efficient. Transportation costs vary from country to country whether its pipelines, large tankers or smaller ships. All countries have different regulations, taxes, tariffs and restrictions causing variation in pricing. The prices of gasoline vary from city to city, state to state and country to country to a large number of reasons ranging form spatial, horizontal, vertical and time. The production of gasoline is very complex and the process from crude oil can be very involved causing many countries not to be able to achieve 8

9 quality products. Price transmission between crude oil and gasoline have been found to be true but not necessarily world wide. Figure 6. Percent Change in Prices versus Exchange Rates %Change in Prices and Exchange Rates Percent Change Oct-12 May-13 Nov-13 Jun-14 Dec-14 Jul-15 Jan-16 Aug-16 Date UK Pit Canada Pjt UK Exchange Canada Exchange A countries exchange rate can have a positive or negative impact on their price of gasoline due to a variety of government restrictions as well as economic patterns. The variation in input prices and output prices cause a great deal of transmission. While a country like the United States with high quality equipment can change the cheapest form of crude oil into premium gasoline has a large impact on how the price is transmitted. Increases in oil prices cause a strong correlation on the impact of retail gasoline prices. Shocks in crude oil prices can cause a drastic impact on the price of gasoline. In the short run there tends to be more of a price transmission but in the long run it does not seem to be as much of an impact. 9

10 Vertical 1. Introduction Figure 7. Vertical Organization of Regular Gasoline Crude oil is extracted Drilling well connects to refinery Refinery does fractional distillation Continue Refining using Catalytic Cracking Chemical Processing Pipeline, Supertanker or Barge transport I chose my product form to be the same as I have done in previous exercises, regular unleaded gasoline in the home market of the United States of America. Gasoline is a refined form of crude oil or petroleum, petroleum is the worlds leading supplier of energy today. Petroleum is a common fossil fuel so it essentially comes from million year old plants and animals from in the ground, with most of the worlds crude oil coming from Persian Gulf, Alaska and the Gulf of Mexico. As you can see in Figure one, the first step in creating gasoline comes from finding a crude oil reservoir to be drilled, the drilling system is a complicated mix of pipes and valves using pressure to extract the oil. The next stage after the oil is gather is to put it through a refinery or a system called fractional distillation to heat and break down the oil into smaller chains. This process does not create gasoline but it takes the gasoline out of the crude oil in order for the next process. The next step is among the most important towards refining the oil, catalytic cracking uses high pressure and temperature to change the petroleum using aluminum, platinum, clay and acids to break down the molecules. After being refined, net chemicals are added so gasoline does not burn quickly, unleaded gasoline does not need this stage due to the continuation of refining. Crude oil can be traded through contracts in which they can lock in selling prices for short or long term runs. The wholesale market of gasoline and crude oil is very vast and complicated through many long term and short term contracts ranging from 20 years to 1 day. A supplier or retailers purpose and prior arrangement can range from a major oil company, independent retailer or an unbranded retailer. Gasoline is traded on the open market and can change prices every minute which causes the market, competition and other driving factors to affect the costs. The government will also have an impact on the pricing through taxes, tariffs, restrictions, and various fees. 10

11 2. I chose prices from the United States market using retail gasoline prices, crude oil imported and domestic, and the spot price of crude oil. Crude oil is the direct component of gasoline and petroleum products. There is a large amount of white space within the first graph but then broke the graph down into two parts (Figure 3 and Figure 4), before 2000 and after 2000 which was when prices started to drastically increase than the previous 15 years. As you can see that the retail price of gasoline is the last stage of vertical process so the price will almost always be higher than the previous stages. All the prices tend to follow the same variation, as crude oil prices increase so does the retail price of gasoline. Our home market of the United States does both import crude oil as well as extract crude oil, so the prices tend to have an impact on the retail price as well. Our refineries are among the nicest and most complex in the world which allows us to import very cheap quality gasoline and refine it to become premium product. When we have cheap imports it allows our domestic price to increase until our cheap product is refined and exported. As you can see in the two graphs, the prices all follow the same pattern and trends which are impacted by outside forces. There are various important changes in the organization that have occurred including government restrictions, organizations, and policies. OPEC had a huge impact, currently it has 12 member countries and they coordinate and unify policies. They create ceilings and quotas to its members which highly regulate it. Government tariffs, policies, agendas and regulations have also impacted crude oil through various reasons. They often are working on the agenda of a larger organization or on their own behalf. Refineries have become more established and complex leaving smaller and less wealthy countries out of the race. The trading market has also impacted it, reports show as crude oil futures grow, petroleum futures reduce because the incentives of upstream and downstream are higher. The barriers to entry in the petroleum industry are very high do to a variety of reasons including legal and investments. There are very high costs associated with starting any vertical aspect of petroleum industry due to the complex equipment and technology. The government also has many levels of regulations and ownership applications, along with patents and copyrights. According to ibisworld, the industry has high barriers to entry with heavy regulation and completion, high capital intensity with a very high revenue volatility. I would classify each stage in the vertical market as very competitive. The whole petroleum industry is nearly based off of crude oil, so the stages may have similar drivers with reference to that. Global crude oil prices are based off milliions of different variables ranging from weather, inventory, investment projections, global economics, supply and demand. The first few stages are correlated, the finding and extracting of crude oil. This sets the amount of supply within the market, the key driver to the entire industry. Weather, equipment, labor and availability are all major drivers within this range. The next part is the refinery and chemical extraction and combination. This part is essentially based off the previous part, if they cannot extract the oil this part has no oil to break down. The drivers are the same. The last step is the pipeline and delivery, this is also based off the previous two steps with no inventory there is no supply to be transported. This step is also based off the demand, which has factors like economy, weather, trades, regulations, wars, theft, prices. 11

12 Figure 8- Crude Oil Prices Imported and Domestic, Retail Gasoline Prices, Spot Crude Oil Prices. Source: US Vertical Margins of Crude Oil and Gasoline eia.gov Price Jan-1986 Apr-1987 Jul-1988 Oct-1989 Jan-1991 Apr-1992 Jul-1993 Oct-1994 Jan-1996 Apr-1997 Jul-1998 Oct-1999 Jan-2001 Date Apr-2002 Jul-2003 Oct-2004 Jan-2006 Apr-2007 Jul-2008 Oct-2009 Jan-2011 Apr-2012 Jul-2013 Oct-2014 U.S. Total Gasoline Retail Sales by Refiners (Dollars per Barrel U.S. Crude Oil Domestic Acquisition Cost by Refiners (Dollars per Barrel) U.S. Crude Oil Imported Acquisition Cost by Refiners (Dollars per Barrel) Spot Price Crude Oil (Dollars Per Barrell Figure 9- Crude Oil Prices Imported and Domestic, Retail Gasoline Prices, Spot Crude Oil Prices Price Jan- US Vertical Margins of Crude Oil and Gasoline eia.gov Aug- Mar- Oct- May- Dec- Jul-2003 Feb- Sep- Apr- Nov- Jun- Jan- Aug- Mar- Date Oct- May- Dec- Jul-2010 Feb- Sep- Apr- Nov- Jun- Jan- Aug- Mar- Oct- U.S. Total Gasoline Retail Sales by Refiners (Dollars per Barrel U.S. Crude Oil Domestic Acquisition Cost by Refiners (Dollars per Barrel) U.S. Crude Oil Imported Acquisition Cost by Refiners (Dollars per Barrel) Spot Price Crude Oil (Dollars Per Barrell 12

13 Figure 10- Crude Oil Prices Imported and Domestic, Retail Gasoline Prices, Spot Crude Oil Prices. Source: US Vertical Margins of Crude Oil and Gasoline eia.gov Price Jan-1986 Aug-1986 Mar-1987 Oct-1987 May-1988 Dec-1988 Jul-1989 Feb-1990 Sep-1990 Apr-1991 Nov-1991 Jun-1992 Jan-1993 Aug-1993 Mar-1994 Oct-1994 May-1995 Dec-1995 Jul-1996 Feb-1997 Sep-1997 Apr-1998 Nov-1998 Jun-1999 Date U.S. Total Gasoline Retail Sales by Refiners (Dollars per Barrel U.S. Crude Oil Domestic Acquisition Cost by Refiners (Dollars per Barrel) U.S. Crude Oil Imported Acquisition Cost by Refiners (Dollars per Barrel) Spot Price Crude Oil (Dollars Per Barrell 3. The market margin of a product is the difference between what someone pays for a product versus what they sell a product for. I compared the retail price versus the crude oil price, the domestic crude oil price versus the spot price and the imported price versus the spot price. In most instances the margin is positive but in some cases along the line the crude oil spot price was more than the imported or domestic price which caused a negative percentage. This is when the market conditions were worse than expected and they had to salvage what they could. As you can see in figure 5, he most drastic margins are from the retail standpoint when they can range from 20 percent increase to a 140 percent increase. All the prices tend to follow the same trend and pattern but in some instances as the retail prices decreased the crude oil prices increased as you can see in the bottom right hand of the graph. As well as the opposite like in the middle of the graph when the retail prices were nearly 140% increase the crude oil prices were dropping below 0. There are clearly price transmissions within the global petroleum market. The base product is crude oil which is exchanged around the world, the price of crude oil is transmitted to all products derived from it which means regular gasoline doesn t change crude oil price but vice versa. With increase in prices to crude oil, you can see that prices across the market increase. As well as for when supply increase for crude oil, the price of gasoline should drop as well. This is call symmetric price transmission which means that crude oil has the direct correlation toward the prices of all the products correlated to it. 13

14 Figure 11- Market Margins % 120% 100% Market Margins Market Margin 80% 60% 40% 20% 0% -20% Margin of Retail Margin of Crude Oil Domestic Margin of Crude Oil Imported 14

15 Horizontal I) Price Variation Figure 12. Price Variation Of Premium, Midgrade, and Regular gasoline at 5 Stores 5 Price Variation Across 5 Stores on Atherton of 3 Types of Gasoline 4 Frequency More Bin Range II) As you can see by graph 12, the major price points are at $2.30 and $2.50 while $2.70 is the third highest amount. I chose 5 stores on the same Atherton Street in State College, PA and collected the prices of Regular, Midgrade and Premium gasoline at each of the stores. The stores Giant, Snappy s and Sunoco all have the same prices, while Shell and Exxon has a variation in their prices due to a variety of reason which I will explain later. Comparing both of them to the prices of the 3 stores, Shell has a 10 cent raise on both their Regular and Premium options while Exxon is cheaper by four cents for the regular and their premium is more expensive by 6 cents. Price and Attributes The data seems to have a relationship between the attributes that can be explains. The top 5 most important attributes to help define the product that I chose was their presentation, discounts available, cash only options, location off major road, and the chemicals added. The two stores, Exxon and Shell, both are cash only which has a large impact on their price. Exxon is able to be cheaper on Regular and Premium gasoline but Shell is the opposite and more expensive on Regular and Premium. Exxon and Shell are also the only stores that offer Top-Tier 15

16 III) gasoline which is blended with a variety of cleaning chemicals to make the gasoline and car last longer. Giant and Shell both offer discounts on store membership. Giant and Snappys are actually in between the 5 stores, the two stores on the outskirts and also happen to be next to major road ways are the ones with different price. Sunoco is off of College and Atherton, Exxon is off Park and Atherton, and Shell is off Blue Course Drive and Atherton. Some attributes like the brand name of the gasoline, and the chemicals added to complete the process and the storage facilities of the gasoline all have little to no impact on the price because they are unseen. Product Differentiation and Competition The position of the products show that the perceived prices and quality of the gasoline is generally even across the board. All companies are known for their gasoline provided services but some facilities are generally higher-end convenience stops which allow it to have a different position as opposed to Exxon. They are all popular brands and organizations but the amount of competition in the field creates an even market as opposed to a monopolistic one. REFERENCES Made on Excel. Data from

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