Petroleum products selling prices

[sheiko]

Hi,

Could you please explain how is the selling prices of a petroleum product (such as motor gasoline and diesel) fixed? I suspect comprises the market price plus a margin, but I would like to know what is the main method to fix the selling price?

Thanks.

"We don't believe things because they are true, things are true because we believe them."

 

[BigInch]

I thought it was when purchase cost of crude, processing cost, transportation, profit margin and ... most of all .. road taxes.

Let your acquaintances be many, but your advisors one in a thousand’ ... Book of Ecclesiasticus

 

[sheiko]

Thank you. Your method is quite logical but I thought the selling prices of petroleum products are not fixed as for other goods and services. I have heard that selling prices are equal to the CIF (Cost, Insurance, Freight) prices, but not sure at all...I would like to have more clue on it.

"We don't believe things because they are true, things are true because we believe them."

 

[zdas04]

Motor fuel is a commodity with very little price flexibility at every stage.

The retailer sets each day's price by the cost of replacement. So if a retailer has 10,000 gallons of fuel in inventory that he paid a weighted average price consistent with a sales price of $3.50/gallon and his supplier says that today's truck is coming in at a price consistent with $4.00/gallon sales price then the pumps are changed to $4.00 even before the truck gets there. There isn't much mark-up by the retailers (they really do make their money from the overpriced junk inside). Say that number is 4%. Then his price off the truck is $3.39, his profit is $0.14, and state and federal taxes are $0.47 (Federal is $18.4, and the state taxes are all over the map, but the average is $0.286).

The $3.39 represents the wholesaler's cost of doing business, his profit, and the cost of the gasoline. His direct costs (salaries, trucks, fixed facilities) are probably around 15% of the sales price (call it $0.51). His profit and overhead are probably 5% of gross (call it $0.17), so his cost of product is probably around $2.71.

The transporter who got the gasoline to the wholesaler is probably getting $0.30/gallon to cover his overhead, direct costs, and profit. So he must be paying $2.41/gallon.

The refinery spent a few billions of dollars to build the facility and will only make that kind of investment for a decent return (a return that Wall Street demands). But does he get it?

Say that the price at the inlet to the refinery is $100/bbl. Say that half of the inlet stream can be made into gasoline. The other half can also be made into valuable products, so basically the refinery is paying $50/bbl for the part that goes into gasoline ($50/bbl / 21 gallons = $2.38/gallon). If the refinery is paying $2.38 and getting $2.41 then their markup is 1.3% to cover everything from capital recovery to salaries to maintenance to overhead.

Evil, gouging oil companies? No wonder the stock of companies who are primarily refiners has been in the doldrums since 1986.

David

 

[jmw]

Not to neglect the impact of OPEC on "fixing" the price of crude by regulating output.


JMW

http://www.ViscoAnalyser.com

 

[BigInch]

sheiko, I didn't say any one of those costs are fixed. They can all vary within the supply and marketing constraints, upset market factors, government ability to tax, consumer's ability to pay, so the final price is the net result of all those factors on any given day.

Let your acquaintances be many, but your advisors one in a thousand’ ... Book of Ecclesiasticus

 

[sheiko]

Thanks BigInch.

To be clearer, what I don't understand is how to set the selling price of ONE product, when the cost for refining, for storing, the cost of the capital invested, etc.... are GLOBAL COSTS that take into account the production of ALL the products.
I mean, how do you relate the selling price of diesel for example, when you don't know the value of it among all the costs?

"We don't believe things because they are true, things are true because we believe them."

 

[BigInch]

Theoretically products could have different refining costs, based on time at a given temperature and pressure, or some similar algorithm, but it is also true that a global cost could simply be calculated for all products by for example just taking a year's of the refinery's capital cost + a year's of its operating cost and dividing that total cost by the total number of barrels processed during the year. That would give you the same refining cost per barrel for each product run through the refinery. The problem with that method is, while it may be convenient to consider it so, it is also obvious that a higher market price product would be able to adsorb more of the refinery processing cost than a cheaper product simply by applying a same percentage markup.

You also have to remember that volume purchased at any one sitting can impart large differences into the cost factor involved too. That isn't going to make sense when taken into the above refining cost algorithm either. It obvioulsly isn't going to make much of a difference in cost in producing 1 bbl of gasoline, or 1000 bbls of gasoline in a continuous process, but transport and storage have some factors that might result in differences that would affect the per bbl cost of transporting 1 bbl or 1000000 bbls.

There is a theoretical relationship between all hydrocarbons based on simply the equivalent calories each one brings to the table, there are many other variables that can affect that simple comparison. While they all have theoretically interchangable calories, each form of fuel is not exactly and totally interchangable with another when it comes to determining one value in a particular form and at its particular point of use, but those finalities must be worked out by middle men of the cost of the supply chain. So despite all the above, if your company is the ony one that can get a useable fuel to a consumer at the top of some remote mountain top, you're probably going to be able to ask for a premium for doing it too.

You could obviously make as large and as complicated an algorithm to determine cost based on logic as you have numbers to enter into it, but then you still must consider how much of what fuel your competitors have on the market at any given time and place too, so the above algorithms might only serve to let you know how much money you make or lose per bbl, since the final cost is also the result of competitive factors combined with the fluctuations of market supply and demand.

Now don't forget the taxes.


Let your acquaintances be many, but your advisors one in a thousand’ ... Book of Ecclesiasticus

 

[zdas04]

To further complicate this, not all the byproducts of refining are burned for fuel. Many are feedstocks for manufacturing plastics. The heating value of these streams is irrelevant.

David

 

[BigInch]

Exactly. All the logical methods of determining price are nice, but as I said, they probably just serve to let you know relatively how much money you are making or losing. In the end (in a capitalistic economy) the basic sales price for the various standard contract volumes are determined by the supply and demands at the comodity markets, so all other true sales prices must essentially be derived from those values according to the volume, location and time attributes defined in the final sales contract.

Let your acquaintances be many, but your advisors one in a thousand’ ... Book of Ecclesiasticus