Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal. Unfortunately my co host Tracy Alloway is
Speaker 1: off today. Nonetheless, we're gonna hopefully have an important conversation
Speaker 1: about gasoline. It's been on this pretty big tumble over
Speaker 1: the last two months, but I still sense that, you know, okay,
Speaker 1: it's sort of tied to the price of oil. Oil
Speaker 1: prices have come in, but it feels like there's a
Speaker 1: lot more to it than just the oil price. It
Speaker 1: certainly doesn't move and just lockstep with oil. There's refining,
Speaker 1: there's regional variations, there's variations from one gas station to
Speaker 1: another literally right next door. So there's at least to me,
Speaker 1: still there's still a lot of mystery about like why
Speaker 1: the price of gas is what it is. Why does
Speaker 1: it always seem to end in ns. I've never gotten
Speaker 1: an answer to that, whether it's to ninety nine or
Speaker 1: nine or four ninety nine seems to be popular, all
Speaker 1: these things. You know, gas is so central's so central
Speaker 1: the economy. Ever since gas started going down, prices started
Speaker 1: going up. Biden's approval ratings started ticking up when gas
Speaker 1: prices started following, and of course vice versa. The price
Speaker 1: of gas feels like it's determinant of almost everything these
Speaker 1: days in American life. And so why do we learn,
Speaker 1: like what causes the price of gasoline? So to answer
Speaker 1: all of our questions or I guess in this case,
Speaker 1: just all of my questions. I want to bring in
Speaker 1: Patrick to Han. He has the head of petroleum analysis
Speaker 1: at gas Buddy, which is a service that provides price
Speaker 1: tracking for consumers, tells them where the different prices are
Speaker 1: at different stations around them. He's been at gas Buddy
Speaker 1: for thirteen years. He knows everything about the price of gasoline,
Speaker 1: and if you follow him on Twitter, he is always
Speaker 1: answering in a pretty direct manner what's going on with gasoline.
Speaker 1: And when he's when prices going up, Republicans love him
Speaker 1: and talk about how terrible the White House is doing,
Speaker 1: and when the price is going down, everybody flips sides.
Speaker 1: And meanwhile he keeps it a political and just says,
Speaker 1: this is going on with gasoline, even though it's so
Speaker 1: so central to what's going on. So Patrick, thank you
Speaker 1: so much for coming on odd lots, Thanks for having me.
Speaker 1: It's certainly always fun, you know, when prices go up
Speaker 1: or down to see the movements and watch all the
Speaker 1: politicians change sides, right, And in one minute it's great
Speaker 1: and the next it's not. That I mean that is
Speaker 1: by pressure just for watching your Twitter handle, Like you're
Speaker 1: like talking about the price of gasoline, and suddenly you
Speaker 1: see so viscerally how central gasoline is to say, American politics,
Speaker 1: by essentially like who is attacking you at any given
Speaker 1: moment for just for just tweeting out the news. Yeah,
Speaker 1: that's that's really true. People have a problem with prices
Speaker 1: going up, and they have a problem with them then
Speaker 1: coming back down. And you know one side likes when
Speaker 1: prices go up or down. It's you know, it's become
Speaker 1: very political. We'll just say it that way. Well, let
Speaker 1: me ask you a question that is I don't think
Speaker 1: political at all, but so it's a super basic question,
Speaker 1: but is at the core of what you do with gas, buddy,
Speaker 1: And I also think it can maybe help us like
Speaker 1: almost like work backwards and figuring out the price of gas.
Speaker 1: But if if your app essentially compares, well, what is
Speaker 1: gas at this corner station first, maybe what you could
Speaker 1: get if you drive three blocks away or ten blocks away.
Speaker 1: It immediately raised the question like, why is guess the
Speaker 1: price of gasoline different at one station to another? Why
Speaker 1: is there variation within gas station is very close to
Speaker 1: each other? Well, and it's it's really loaded, uh and
Speaker 1: very complex. I'll try to dumb it down. But essentially, gasoline,
Speaker 1: like oil and other commodities, the prices that stations are
Speaker 1: paying will change on a daily basis. There may be
Speaker 1: different suppliers, there's different competitors. So essentially at the station level,
Speaker 1: stations are all paying something different depending on the timing
Speaker 1: of how much they're buying, who they're buying from. And
Speaker 1: with oils so volatile this year, because of a lot
Speaker 1: of these high level factors recovered from COVID, Russia's war
Speaker 1: in Ukraine, the overall economy, the price of oil and
Speaker 1: gasoline has been gyrating violently. So one station may get
Speaker 1: a twenty five cents again less than another, and so
Speaker 1: that goes into you know, these various hotspots. But stations
Speaker 1: also when prices have been declining as they've been for
Speaker 1: the last nine weeks, stations have incredible latitude to either
Speaker 1: lower their prices very quickly as their cost goes down,
Speaker 1: or kind of more slowly depending on if they got
Speaker 1: the timing right this year, stations may have a different
Speaker 1: financial position, that is, they may be hurting when prices
Speaker 1: went up because, as many people do not know, it's
Speaker 1: oftentimes very hard to be the first one to pass
Speaker 1: along the price increase, so stations take it on the
Speaker 1: chim one prices go up, and when prices go down,
Speaker 1: they're in less of a hurry to lower prices, and
Speaker 1: that can some of these hotspots where there may be
Speaker 1: in a very aggressive gas station that wants to lower prices,
Speaker 1: and some others may not be so aggressive, and that
Speaker 1: can cause a lot of variety and what you're paying locally.
Speaker 1: I don't know if there is an average gasoline station.
Speaker 1: I'm sorry, these are gonna be all very do we
Speaker 1: might just do thirty minutes of like extremely rudimentary questions
Speaker 1: about how gasoly works. So I hope that's cool, But
Speaker 1: I don't know if there is an average gas station.
Speaker 1: But to the best you can answer the question, how
Speaker 1: often do gas stations themselves get a refill and how
Speaker 1: close to the bottom of their own tanks do they
Speaker 1: get typically before a refill? Like, how do gas stations
Speaker 1: play that? Well, it depends on the size of the
Speaker 1: gas station. Some mom and pops may simply order when
Speaker 1: they need more, whereas the pros, the companies that may
Speaker 1: own many stations may have somebody that buys fuel and
Speaker 1: looks at markets to know when to time it right.
Speaker 1: It's like an airfare, right the airfare has change on
Speaker 1: a daily basis, and if you want to fly, you're
Speaker 1: just gonna buy airfare, Whereas if you're buying a lot
Speaker 1: of airfare, you may weigh a day, a day or two.
Speaker 1: So you know, at the station level, stations are kind
Speaker 1: of adjusting their prices looking at that. But you know,
Speaker 1: it's again going back to the volatility. It's it's been
Speaker 1: such a crazy year that not every station has that
Speaker 1: competitive advantage where somebody can just watch the price that
Speaker 1: they pay. So bigger stations that have more stores may
Speaker 1: have a leg up in terms of having, you know,
Speaker 1: somebody that may be in a position to simply watch
Speaker 1: the markets and to be able to time purchases right.
Speaker 1: But when prices have gone down, it's all very subject
Speaker 1: to competition. How quickly prices go down, There's there's just
Speaker 1: so many things that go into it. But ultimately, now
Speaker 1: we've seen prices go down for nine weeks, and I
Speaker 1: think the most frequent thing I've been asked in the
Speaker 1: last nine weeks is why is X town you know
Speaker 1: X since per gown lower than mine? And it really
Speaker 1: has to do with just competition and whether or not
Speaker 1: there's like a status quo or if there's a wholesale club,
Speaker 1: if they're aggressive and lowering price. It certainly varies widely.
Speaker 1: I was wondering about the competition question. If there's like
Speaker 1: a town with lots of gas stations and lots of
Speaker 1: consumer choice, can you sort of empirically show that there
Speaker 1: is more gas price volatility or maybe more aggressiveness on
Speaker 1: pricing than say a single gas station like in the
Speaker 1: middle of Death Valley, California, that no one else can
Speaker 1: you know it's your only chance to fill up for
Speaker 1: another hundred miles. Well, it's really fascinating because oftentimes we
Speaker 1: find that the solo gas stations by themselves are generally
Speaker 1: the ones that may charge a little bit more. But
Speaker 1: there are exceptions to the rule, and it may happen
Speaker 1: more often than motorists realize that that there's an exception.
Speaker 1: I think there's a couple stations that I watch that
Speaker 1: are aggressively lowering prices, and they are all by themselves.
Speaker 1: So I think the majority, like you said, if you're
Speaker 1: in the if you're in the middle of of of
Speaker 1: Death Valley, you have a cap of audience and prices
Speaker 1: are more likely to be above average in that situation.
Speaker 1: But there are some holdouts in the country that I
Speaker 1: can say this station is solo, but it's also bringing
Speaker 1: prices down in the majority of stations that surrounded miles away.
Speaker 1: And and why would that be, like is it what?
Speaker 1: What would be the reason why a gas station that
Speaker 1: doesn't have a lot of competition in its proximity may
Speaker 1: still be aggressive on pricing. They may want to pull
Speaker 1: people in from a further distance away. You know, if
Speaker 1: you're if you're a couple of miles down the road,
Speaker 1: and and your station is not in the best geological
Speaker 1: location to pull traffic in people that use the gas,
Speaker 1: but at may see that you have a low price
Speaker 1: two miles down the road, and so some of those
Speaker 1: low prices can lure people in. Economists must always be wanting, uh,
Speaker 1: they must always be trying to get your data, because
Speaker 1: I could imagine there a lot of interesting sort of
Speaker 1: like real world tests that can be seen from it
Speaker 1: about the degree to which transparency in pricing effects markets themselves,
Speaker 1: because you know, maybe like Okay, these days, you're like, oh,
Speaker 1: I will drive two miles down the road to get
Speaker 1: cheaper gas lane because the gas buddy app says I
Speaker 1: could uh save ten cents a gallon or something like that.
Speaker 1: But at one point in the past, consumers just didn't
Speaker 1: even have that knowledge, and so perhaps pricing discrepancies or
Speaker 1: divergences could persist longer. Yeah, you know, there is a
Speaker 1: lot of market for this data potentially, you know, if
Speaker 1: not only from you know, entities that want to watch
Speaker 1: this and better understand it, but stations may you know,
Speaker 1: want to to look at their own station data and
Speaker 1: compare it to their competition as well to make sure
Speaker 1: they have an edge. So I mean there's a heavy
Speaker 1: market for this. I mean, it's information, and you know,
Speaker 1: gas prices are so prevalently priced you can't escape them,
Speaker 1: and and so yeah, I mean I think there probably
Speaker 1: is a lot of interest from the consumer level to
Speaker 1: the business that wants to be as aggressive as possible
Speaker 1: and they want to know that their price is the lowest, right.
Speaker 1: I think that's if anything is true of a lot
Speaker 1: of stations is they want to compete, They want to
Speaker 1: have the lowest price, and they want to make sure
Speaker 1: their prices below the competition. What about the question of margins?
Speaker 1: How much do gas stations make actually selling retail gasoline
Speaker 1: above wholesale typically? And then does it change much for
Speaker 1: gas stations that have significant ancillary businesses. Some gas stations
Speaker 1: are literally just like a guy in a little you know,
Speaker 1: the tiny building and one pump, whereas then you have
Speaker 1: others with lots of pumps. But then there's a food
Speaker 1: court inside the gas gas station and gifts and other
Speaker 1: things like that, in which case bringing people in, maybe
Speaker 1: you lose money on the gas, but you can make
Speaker 1: a lot of money on selling drinks and stuff like that. Well,
Speaker 1: there's a perfect example. You mentioned food for it, and
Speaker 1: I want right to it write. Some of the wholesale
Speaker 1: clubs that exist, they will take a much thinner margin.
Speaker 1: That is, they'll make five or ten cents a gallon
Speaker 1: instead of twenty cents a gallon or even you know,
Speaker 1: maybe fifteen cents to get you to the location, because
Speaker 1: what better way to get you to their store to
Speaker 1: buy fifty rolls of toilet paper or a forty eight
Speaker 1: path of your favorite drink than to get you there
Speaker 1: with a low price. So there is absolutely difference in agenda.
Speaker 1: And some stations will have a lower price to get
Speaker 1: you to their location, whether it's a wholesale club or
Speaker 1: one of these large format gas stations that are extremely popular.
Speaker 1: You know, they'll have a whole you know, slew of
Speaker 1: of different food options. So price is a great way
Speaker 1: to get people to your location. And then as you mentioned,
Speaker 1: to go in the store where margins are higher, but
Speaker 1: those locations they'll still make some money. It maybe five
Speaker 1: fifteen cents a gallon compared to the competition could be
Speaker 1: twenty to thirty cents. And now those margins even at
Speaker 1: the big outlets, will vary depending on what's going on
Speaker 1: you talk about, you know, the Russian invasion of Ukraine
Speaker 1: and the wholesale price of of of oil and gasoline varying.
Speaker 1: There will be times of the year, very brief times
Speaker 1: that a station could make an excess of fifty cents
Speaker 1: a gallon. Now that's not normal, right, that is extremely abnormal.
Speaker 1: I would say that over the course of the year,
Speaker 1: a well run station will average a margin of between
Speaker 1: twenty and thirty cents a gallon, which isn't a whole lot.
Speaker 1: And keep in mind, when prices are higher, they're going
Speaker 1: to make less margin because those interchange fees, if you're
Speaker 1: using a credit or debit card, there's a cost two
Speaker 1: station owners that they don't often or all the time
Speaker 1: pass along to you. And and that fee goes up
Speaker 1: as the price of gasoline has been higher. Wait, I
Speaker 1: hadn't even I hadn't even thought about that. So what
Speaker 1: happens the higher the nominal price of gasoline, they have
Speaker 1: to pay a higher higher check to the to the
Speaker 1: to the credit card companies. Exactly, it's very much like
Speaker 1: a commission. You know, if you sell a home that's
Speaker 1: worth a million dollars, your commission two and a half percent,
Speaker 1: a heck of a lot more so in a million
Speaker 1: dollar home that is a hundred thousand dollar homes. So
Speaker 1: as the price of gasoline goes up, those interchange fees
Speaker 1: charged by credit card companies are taking more a bite
Speaker 1: out of the station's profit. That's really interesting. I hadn't
Speaker 1: I hadn't thought about that, So is it true? But
Speaker 1: it is true sort of empirically that we can see
Speaker 1: that the gas stations, if they're attached to something that
Speaker 1: sells more, whether it's a large format gas station like
Speaker 1: a BUCkies that people want to go into because they
Speaker 1: have clean bathrooms and food, or a Costco or a
Speaker 1: Walmart or maybe where maybe they'll sell you like, you know,
Speaker 1: a bunch of rolls of toilet paper as well. Those
Speaker 1: consistently have lower prices than a sort of small mom
Speaker 1: and pop or a place that sells nothing but gas exactly.
Speaker 1: Not only do they have the different agenda keep their
Speaker 1: prices down, but they may have pricing power too. I mean,
Speaker 1: there's definitely an incentive for a finer that's producing gasoline
Speaker 1: to make a deal with a big club like a
Speaker 1: Costco or BUCkies because they're volume through, but they can
Speaker 1: help that refinery, you know, sell through more of its gasoline.
Speaker 1: So those bigger stations, those bigger format stations sell more.
Speaker 1: They can have a lower price because the refinery may
Speaker 1: be more incentivized to make a better contract offer with
Speaker 1: them as an outlet to get rid of that fuel.
Speaker 1: Would these be national contracts that a company like Walmart
Speaker 1: or Costco or BUCkies, which is I guess sort of regional,
Speaker 1: but some sort of contract like a blanket contract that
Speaker 1: would affect all of their locations, or would be a
Speaker 1: series of contracts with regional refiners. You know, it can
Speaker 1: be both. It depends on the scope of the refiner.
Speaker 1: If that refiner has refineries in every region where the
Speaker 1: store has outlets, it could be in every market. But
Speaker 1: oftentimes that's not the case. You may not have a
Speaker 1: shell refiner in the West Coast, but you may have
Speaker 1: a shell refinery in Texas. So sometimes it may be
Speaker 1: localized two different regions, depending on what refineries operated in
Speaker 1: a given region. I want to get to more of
Speaker 1: the sort of refining question and the degree to which
Speaker 1: refining adds to the price of gasoline. But before we do,
Speaker 1: you know, get you you offered tweeter like, oh, the
Speaker 1: most common what is the most common price of gasoline
Speaker 1: right now? We're recording this on August, But what's the
Speaker 1: most common price of gasoline in America right now? Well,
Speaker 1: let's take a look here. As I look where three
Speaker 1: nine is the most common price across the US, and
Speaker 1: they're all ending with the nine. I mean, why is that?
Speaker 1: And that's just like yeah, yeah, so is that just
Speaker 1: as obvious as it seems that It's like it looks
Speaker 1: better to say three than four or three forty nine
Speaker 1: than three fifty. It's like it really is, it really is?
Speaker 1: You know, no hard I'd be hard pressed to find
Speaker 1: any state and that ends in a zero, because why
Speaker 1: ending a zero three fifty, for example, it sounds a
Speaker 1: whole lot worse than three forty nine. So everyone's going
Speaker 1: to take the nine instead of the zero. And you
Speaker 1: never see a four oh one? Have you ever seen one?
Speaker 1: I mean, I've seen a four oh one. It always
Speaker 1: has me scratching my head, like why don't you stay
Speaker 1: at four oh three and then make the jumps of three?
Speaker 1: You know, that's really funny. So that's all psychology. How
Speaker 1: much like sort of like broad regional difference is there
Speaker 1: in America depending on whether, say you're in Iowa versus somewhere,
Speaker 1: you know, in an expensive part of California. I know,
Speaker 1: I'm pretty sure gasoline is very expensive in Hawaii or
Speaker 1: it has to be uh has to be shipped in
Speaker 1: maybe the I don't even know the word. How many
Speaker 1: like price regions are there in the US. There's five,
Speaker 1: and that's defined by an acronym PAD Petroleum Administration for
Speaker 1: Defense District, and that goes back to world War two,
Speaker 1: when we slice the country into five pieces for strategic purposes,
Speaker 1: and now those those regions define you know, there's different
Speaker 1: supply demand aspects in each one of those regions. And
Speaker 1: to your point, each one of the regions has a
Speaker 1: different price based on the supply and demand balance in
Speaker 1: that region, and it's all defined by you may hear
Speaker 1: about the IMAX the New York Mercantile Exchange, they trade gasoline,
Speaker 1: and then under that every region trades at a different
Speaker 1: basis to what that one overlying market is. And that
Speaker 1: basis can be minus, meaning a region could have a
Speaker 1: discount if they're well supplied and if things are running well,
Speaker 1: some regions can have a premium or a search charge
Speaker 1: based on its supply. Is extremely tight and every region
Speaker 1: right now, as I look at it, between the highest
Speaker 1: and lowest, there's about a fifty cent a gallon difference
Speaker 1: on gasoline, while if you include the West Coast, it's
Speaker 1: even more dramatic, a seventy centigallon difference between the cheapest market,
Speaker 1: which is the Gulf Coast, and that's because there's a
Speaker 1: lot of refineries there and there's a lot of supply,
Speaker 1: and the West Coast, which is the highest is the opposite.
Speaker 1: There's not a lot of refineries. They have special blends
Speaker 1: of gasoline in California, So even there, you're going to
Speaker 1: see a pretty wide gap between the nation's cheapest and
Speaker 1: most expensive. Because even at the basis the base level,
Speaker 1: there's a huge gap of gap between the lowest and
Speaker 1: the highest region. So what is it in the Louisiana
Speaker 1: pad right now? On what is it on the West Coast?
Speaker 1: Like in terms of average prices, Well, you know, not
Speaker 1: taking the consideration tax or pipeline terrorists, so transportation distribution.
Speaker 1: The wholesale price in the Gulf Coast today is about
Speaker 1: two fifty seven a gallon. Now, if you throw tax
Speaker 1: and tarrasan that's where you get a lot of these states.
Speaker 1: Texas right now the state wide average three forty two.
Speaker 1: So you're always going to see a retail price that's
Speaker 1: quite a bit higher because taxes usually slap on about
Speaker 1: sixty cents a gallon, But that to fifty seven in
Speaker 1: the Gulf Coast. In the San Francisco, the Northern California market,
Speaker 1: California is broken to northern and southern. The Northern California market,
Speaker 1: the same price of of what fuel they uses a gallon,
Speaker 1: so two fifty seven and the cheapest community the Gulf
Speaker 1: Coast and the most expensive market, which is northern California.
Speaker 1: So the hierarchy of prices in the United States, like
Speaker 1: you start with this nymex right, is that the r
Speaker 1: bob future. That's exactly it. It's name x are Bob
Speaker 1: is the foundation and everyone will trade at a premium
Speaker 1: or a discount to that name x nmex are Bob contract. Okay,
Speaker 1: so here's another question. I am looking right now at
Speaker 1: the generic first month and imex are Bob contract. Take
Speaker 1: our XP one commodity on the terminal. Now the price
Speaker 1: is not quoted and pergune it's as to ninety is
Speaker 1: the current price? What is that? Like? What is the
Speaker 1: basic volume unit of that contract? How many guests? How
Speaker 1: many gallons are there of those contracts? And and I'm
Speaker 1: assuming you're looking at the front month right now showing
Speaker 1: my screen this September of Yeah, looking at the specifications
Speaker 1: of that contract. You're talking about forty two thousand gallons,
Speaker 1: which is a thousand barrels. Is a contract that's kind
Speaker 1: of the basic contract. Now the CME, which the Chicago
Speaker 1: Mercantile Exchange NIMAX as well. They've done many contracts so
Speaker 1: you don't have to bet as much, but or by
Speaker 1: as much. But that's the base contract is a thousand
Speaker 1: barrels of gasoline, which is forty two thousand gallons. Oh,
Speaker 1: I see, I'm looking at it now. I'm looking at
Speaker 1: the description of the contract. So there's forty two thousand gallons,
Speaker 1: and it looks like one contract value is actually a
Speaker 1: hundred and twenty two d and twenty six dollars for
Speaker 1: one slug of gasoling. So the hierarchy goes. There's the
Speaker 1: NIMAX price. Then there's the five PAD regions, in which
Speaker 1: there's usually some sort of basis above that, although in
Speaker 1: theory at times if there's a lot of inventory and
Speaker 1: region that can be below. And then that's determined by
Speaker 1: various pipelines, another cause of proximity to refineries. And then
Speaker 1: and there are the state taxes. And there's one thing
Speaker 1: you left out, and it's it's even another complicating factor.
Speaker 1: Our BOB is reformulated gasoline. We call them kind of
Speaker 1: the Bob's. It's a family. Our formulation of sea BOB
Speaker 1: is conventional blend stock for oxygen at blending. That's what
Speaker 1: BOB means blend stock for oxygen at blending, meaning that
Speaker 1: you have to add uh an oxygen it to us
Speaker 1: something like ethanol. We used to use MTB, but something
Speaker 1: like that. And so you have our BOB reformulated, Sea
Speaker 1: Bob conventional and out in California it's California are Bob.
Speaker 1: So California Air Resources Board has its own requirements, So
Speaker 1: out in California it's car Bob CARBOB. I assume there's
Speaker 1: some lower emissions, cleaner burning that What regulates the Bob's
Speaker 1: is the r VP, the read vapor pressure, which measures
Speaker 1: volatility of fuel, how easy that fuel may or I
Speaker 1: should say, the pressure of of emissions from burning a
Speaker 1: gallon of fuel. So summer gasoline has lower r VP.
Speaker 1: That means the fuel doesn't give off as much emissions
Speaker 1: when it's burned, so it's less volatile. And because temperatures
Speaker 1: can interact with that, you know in the in the
Speaker 1: summer months you see ozone action days, right, because the
Speaker 1: airborne temperature, the ambient temperature interacts with those emissions to
Speaker 1: create more ozone. And so lower our VP is important
Speaker 1: to clean the air up. And depending on where you are.
Speaker 1: California has the most stringent requirements for r VP five
Speaker 1: point nine nine, whereas some of the bigger cities use
Speaker 1: seven point oh p s I r VP, and some
Speaker 1: of the conventional gasoline for summer use is nine point
Speaker 1: zero pounds or P s I r VP. So the
Speaker 1: cleaner the gasoline, the lower the r v P, and
Speaker 1: then when we move into winter the standards go up
Speaker 1: to thirteen point five and fifteen. It's kind of the
Speaker 1: default r VP. So fift P s I in the winter,
Speaker 1: nine p s I in the summer, and the lower
Speaker 1: the r v P, the more you pay, because the
Speaker 1: cleaner burns, the components are cleaner, less voluable, and cost layer.
Speaker 1: So I'm looking right now again. I like this game
Speaker 1: of you describing something in gasoline and me trying to
Speaker 1: find a ticker for it and see if this makes sense.
Speaker 1: I'm looking at a shirt now. On the terminal it
Speaker 1: says l A five point five October carbob prompt different index.
Speaker 1: I think it's prompt, and right now it's nine cents,
Speaker 1: So does that mean that if that sounds right, does
Speaker 1: that mean that there's a nineteen cent premium for the
Speaker 1: California blend basically of gasoline right now. Yeah, that's that
Speaker 1: you're you're looking at the base is difference, So nine
Speaker 1: x right now is to nine if you're looking live,
Speaker 1: and the basis difference for l A is nineteen cents,
Speaker 1: so that would put the carbob price at three one
Speaker 1: and that doesn't include tax, So that you're finding the
Speaker 1: basis that's the differentiator between whether your region is paying
Speaker 1: a premium or getting a discount to that New York
Speaker 1: Mercantile contract. Like I said, the West Coast is generally
Speaker 1: a very tight market, so it's rare to see a
Speaker 1: discount in the summer months in the West Coast, whereas
Speaker 1: it's rare to see the Gulf Coast, ever be at
Speaker 1: a premium because there's so many refineries down there that
Speaker 1: the market is generally well supplied. But if there's a
Speaker 1: major hurricane shutting those Golf Coast refineries down, you can
Speaker 1: see a premium for Golf Coast gasoline. And by the way,
Speaker 1: all these various foundations, these basis points that encourages refineries
Speaker 1: to send gasoline to these regions. Just going to ask
Speaker 1: about that exact question, So to what degree can refineries
Speaker 1: shift the distribution of gasoline depending on where there's a
Speaker 1: premium in a different in a in a given region. Well,
Speaker 1: they can do that and discriminately where pipelines exist. Now,
Speaker 1: the West Coast is essentially cut off from the rest
Speaker 1: of the country. Pipelines flow east to Las Vegas and
Speaker 1: west and the Phoenix, so there's a little bit of
Speaker 1: the disconnect. We always call the West Coast of Petrol
Speaker 1: Island because what's produced there stays there, and you can't
Speaker 1: easily bring material into the West Coast. It's probably faster
Speaker 1: for material to come from Japan or Singapore than it
Speaker 1: is from the Gulf Coast going down to the Panama
Speaker 1: Canal then going up the east uh, you know, up
Speaker 1: the California coast. So well, I mean the time it
Speaker 1: takes to load a ship in the Gulf Coast go
Speaker 1: down through the Panama Canal, and keep in mind the
Speaker 1: expense of sailing through the Panama Canal because it's you know,
Speaker 1: it's expensive toll uh, and that may disadvantage your costs.
Speaker 1: But otherwise much of the rest of the country is
Speaker 1: well connected. Um, gasoline from the Gulf Coast can run
Speaker 1: up the Colonial pipeline to the east coast and it
Speaker 1: ends in Linda, New Jersey. So right now the East
Speaker 1: coast has been extremely tight. An example, the New York
Speaker 1: Harbor market is trading at a fourteen cent premium to nomax,
Speaker 1: whereas the Gulf Coast is training at a thirty four
Speaker 1: cent discount. That set up arbitrage opens the door for
Speaker 1: for refineries in the Gulf Coast to send as much
Speaker 1: material into New York as they can because they get
Speaker 1: more money for it. But the space on the Colonial
Speaker 1: pipeline is limited to the capacity, and right now it
Speaker 1: would not be surprising, given that pretty wide difference, that
Speaker 1: that pipeline is fully allocated, meaning it's out of the room.
Speaker 1: The Colonial pipeline that was the one that got hacked
Speaker 1: last year, right was what happened that? How did the
Speaker 1: distribution of gas move as a function of that pipeline
Speaker 1: having been shut down for a few days, Well, it
Speaker 1: didn't really move, and that was the problem. Now there's
Speaker 1: intermediate storage containers right at the big terminals. You see
Speaker 1: those white tanks above the ground that can hold hundreds
Speaker 1: of thousands, if not millions, of gallons of fuel. I
Speaker 1: think most of the problems from the Colonial was not
Speaker 1: actually the disruption and the flow of fuel, but how
Speaker 1: motorists responded in a panic weigh to exacerbate the the
Speaker 1: you know, the disruption of fuel supplied. People went out there.
Speaker 1: I mean we saw the photos people with plastic shopping
Speaker 1: bags filling up a plastic bag with gasoline, and so
Speaker 1: motorists overwhelmed. Even under normal times when there's not issues,
Speaker 1: they overwhelmed the system. I'm gonna throw out a percentage
Speaker 1: I think of the outages that people experience because the
Speaker 1: colonial of those outages were probably induced by how motorists responded,
Speaker 1: And five percent of the outages were probably because the
Speaker 1: stoppage of the pipeline. So it becomes down to human
Speaker 1: behavior which exacerbated the situation. But we probably would have
Speaker 1: made it through there with limited disruptions. But you know,
Speaker 1: once once the beast was out there, in terms of
Speaker 1: once people thought that there was gonna be disruption, everyone
Speaker 1: ran for the All right, we just have a couple
Speaker 1: more minutes left and want to wrap up. But you know,
Speaker 1: refining capacity has been a really big mac road topic.
Speaker 1: How much of a spread this sort of diminishment of
Speaker 1: refining capacity has caused, you know, on top of the
Speaker 1: price of crude oil, then it has to be refined
Speaker 1: in to gasoline. Lots of talking about early shutdown of
Speaker 1: refiner refineries, especially during when there was this collapse in
Speaker 1: gasoline demand. How much do you think that's appreciated And
Speaker 1: in your view, how much has the constraint of refining
Speaker 1: capacity contributed to Well, really like the huge upward move
Speaker 1: that we saw beginning uh that sort of culminated in June, Well,
Speaker 1: I'd say a lot of it was due to, maybe
Speaker 1: not necessarily, you know, the lack of refining capacity. Humans
Speaker 1: trade right, all of the trades. You see, the way
Speaker 1: the markets moving is because humans are behind it, trading
Speaker 1: based on the tangible value. And the problem is is
Speaker 1: when you start to run out of capacity, it freaks
Speaker 1: the market out because obviously, if if supply or demand
Speaker 1: exceeds supply, you know, prices are going to be on
Speaker 1: a runaway and and and so the market tends to
Speaker 1: be less measured in its response. When you start to
Speaker 1: see you know this this this territory where there's just
Speaker 1: an inability to keep up with the man, the market
Speaker 1: panics and prices start to escalate out of control because
Speaker 1: you know, it's fear based. So people get out of
Speaker 1: control and the market goes up, up, up, up, and
Speaker 1: and so having said that, it's really important that we
Speaker 1: have spare capacity for both oil producers and refining. And
Speaker 1: by the way, that hundred and fifty dollar barrel price
Speaker 1: in two thousand eight, part of the reason why that
Speaker 1: happened is because we ran out of spare capacity. So
Speaker 1: the market just went out of control. That overheated, which
Speaker 1: inherently caused Americans and the global economy to stop using
Speaker 1: as much. And then we finally got our spare capacity back.
Speaker 1: But this has been a story, and again it's happening
Speaker 1: now at the refinery level because of COVID and because
Speaker 1: the nation has been moving away from e v s.
Speaker 1: But I think that's a big reason why prices did
Speaker 1: get so out of control, is because of the possibility
Speaker 1: that that supply was not going to keep up with
Speaker 1: the man. But we're going to need more refinery capacity
Speaker 1: to good news is it's coming online here in the
Speaker 1: next couple of years. Oh that's good. Alright. Final question,
Speaker 1: what is going on with demand levels right now? Because
Speaker 1: a lot of people are questioning this. E I a
Speaker 1: data which shows that somehow demand is below which makes
Speaker 1: no sense because at that point they're still tons of
Speaker 1: people not going anywhere. What's going on with demand and
Speaker 1: what's going on with that data we're getting from the EIA. Well,
Speaker 1: and first of all, it's important to understand the methodology. Right,
Speaker 1: you don't just look at the number and say, oh
Speaker 1: this is You have to dig into what the number represents.
Speaker 1: And for the e I A, it's the best number
Speaker 1: that they can get. They measure, you know, the pipelines,
Speaker 1: the tanks that the moving of products, so there are
Speaker 1: metric is called implied demand or products supplied. Right, You're
Speaker 1: you're basically saying the markets consuming this much because we
Speaker 1: see this much moving through these tanks. But it's not
Speaker 1: the perfect gauge because stations have intermediate storage facilities to
Speaker 1: that are not measured by the e I A. So
Speaker 1: stations could be sitting on more or less gasoline depending
Speaker 1: on the situation, right, because there's intermediate storage devices that
Speaker 1: the EIA doesn't measure. So yes, but he actually looks
Speaker 1: at demand at the retail dispenser, and so our data
Speaker 1: doesn't line up with the I A because E A
Speaker 1: could be flawed in that maybe when prices are plummeting,
Speaker 1: stations are gonna say we're not going to buy ten
Speaker 1: thousand gallons today, We're gonna buy two thousand gallons today,
Speaker 1: and then in three days when prices are lower, and
Speaker 1: the eas data then would say there's less demand because
Speaker 1: they don't see stations right. Stations are slowing down their
Speaker 1: purchases to get ahead of pricing differences, whereas our data
Speaker 1: continues to look at fuel dispensed at the retail station.
Speaker 1: So it's important to understand the guys methodology. There is
Speaker 1: inherent flaws. They just look at it differently. Your data
Speaker 1: does not. Your data shows robust demand. It shows healthy demand,
Speaker 1: certainly not at record levels, and now we're starting to
Speaker 1: see demands seasonally decline. But that's where we are. It's
Speaker 1: it's not as weak as what the EI has been
Speaker 1: suggesting recently. Patrick Dehn, I've been wanting to get thirty
Speaker 1: minutes of your time for a long time to learn
Speaker 1: that you know all these rudimentary, the dumb questions about
Speaker 1: the price of gasoline, like why is it different in
Speaker 1: one place? There's no depth questions, and you know, this
Speaker 1: is my favorite thing to do. It's just there's there's
Speaker 1: not a whole lot of solid answers out there, and
Speaker 1: there's a lot of curiosity, and that's you know, that's
Speaker 1: how I got into this too, So well, really appreciate
Speaker 1: you coming out online. My pleasure, Thanks for having it. Well,
Speaker 1: that was really fun talking to Patrick. I wish I
Speaker 1: could banter with Tracy for a few minutes, but I
Speaker 1: did find that really helpful because A had always been
Speaker 1: really curious about things like, well, how much margin is
Speaker 1: there for a gas station, What are the advantages for
Speaker 1: a gas station that sells other stuff besides gasoline? What
Speaker 1: is the pricing power of the large chains of gasoline stations?
Speaker 1: Why is there such regional variation? So all of these questions.
Speaker 1: Patrick answered very well. Also that e I a thing
Speaker 1: that's been getting a lot of attention because people are
Speaker 1: looking at this falling price of gasoline like, oh yeah,
Speaker 1: it's because the economy is falling off a cliff. People
Speaker 1: are driving less than they were in I don't think
Speaker 1: that's correct. Intuitively, it doesn't seem right, and as Patrick noted,
Speaker 1: the gas Buddy data does not show that kind of
Speaker 1: collapse at all. Although I guess we are past the
Speaker 1: peak of the summer driving season. So really fun talking
Speaker 1: to Patrick and I guess we will leave it there.
Speaker 1: And this has been another episode of the odd Lot podcast.
Speaker 1: I'm Joe, wi Isn't all. You could follow me on
Speaker 1: Twitter at the Stalwart, Follow my co host Tracy Alloway
Speaker 1: at Tracy Alloway, Follow Patrick de Han at gas Buddy Guy.
Speaker 1: Follow our producer Carmen Rodriguez at Kerman Armand, and check
Speaker 1: out all of our podcasts in Bloomberg under the handle
Speaker 1: at podcasts. Thanks for listening