What started out as a routine fill-up at the service station that I frequent has turned into a solid gasoline-price-forecasting model that should spotlight the most-imminent profit opportunities.
Of course, it wouldn't have happened without Sam.
Sam runs a gasoline station 12 miles from my house, in a little, out-of-the-way, suburban town. We have formed a friendship, of sorts, through the years. He's one of the few people I run into on a regular basis who does not ask me where gasoline prices are headed.
He already knows.
My Barometer for Gasoline-Price Forecasting
Truth be told, Sam is sometimes as much as 48 hours ahead of his service-station rivals in terms of knowing what to expect for gasoline prices.
Such insights don't represent much of a benefit to Sam in his business.
But as you'll soon see, they mean a great deal to me.
Sam serves a declining customer base. The business community in the small town that he serves has been hit hard by the economic slowdown. Among town residents, the unemployment rate is well above 15%. The rest of his trade comes from motorists (such as me) who are just passing through on their way into the city (Pittsburgh).
Sam's margins are narrowing, and what passes for a convenience store at his station is small.
That means that, to make ends meet, Sam has to depend on the gasoline sales generated by his six gasoline pumps - to a much larger degree than many of his much-larger rivals.
Having little to fall back upon, controlling his costs is a constant battle.
To cover the frequent budget shortfalls, Sam cannot just charge what he would like to, because the competition down the road, in larger communities, would eat him alive.
But two key factors also keep him from just slashing his prices in order to boost his business through a big increase in sales volume:
- First, Sam has insufficient alternative revenue flow to make it for very long.
- And, second, he is tied into a supply agreement with a major, vertically integrated oil company - the kind that controls the process from the oilfields, through the refineries and distributors, and that sets the effective price at retail outlets - including those that it doesn't control.
That is becoming much more commonplace these days, thanks to the U.S. market's "Big Five:"
- BP PLC (NYSE ADR: BP).
- Chevron Corp (NYSE: CVX).
- Exxon Mobil Corp. (NYSE: XOM).
- Royal Dutch Shell PLC (NYSE: RDS.A, RDS.B).
- Citgo Petroleum Corp. (privately controlled by PDVSA USA Inc., itself a subsidiary of Venezuelan state oil company Petroleos de Venezuela SA).
Surprisingly, this small cadre of big companies is exerting more control over the U.S. market than ever - even though they own fewer stations outright than they used to. Exxon, for instance, is actually phasing out retail station ownership completely.
Nevertheless, these big boys are increasing aggregate control over gasoline sales - by tying retailers into long-term contracts.
Those, like Sam, who sell gas to the public, have few options. They need to obtain volume from somewhere; they certainly do not own their own refineries. And there are few independent refiners left. Even the likes of Valero Energy Inc. (NYSE: VLO) - which used to be the leading independent - is now in the process of becoming a vertical.
If Sam tried to generate business by slashing prices, the big boy providing the product will penalize him for undercutting the larger distribution market (one that may still contain stations owned by or leased from the vertical).
And in any event, the vertical makes far more money from controlling access to product area-wide than from what it is paid by the likes of Sam. So the major supplier's control over pricing is increasingly important to its bottom line.
This is how five oil companies effectively control well in excess of 60% of daily gasoline sales in the U.S. market. They further coordinate control by using OPIS (the Oil Price Information Service) - a very expensive provider of hundreds of thousands of gasoline pricing points from most of the stations nationwide - several times a day.
The Big Five don't even have to speak to one another. They just refer to their computer screens.
This is not the occasion to debate the merits of such consolidation or whether a more effective pricing structure would result from some added competition. But what it does mean is that it is impossible for small-time operators like Sam to buck the system.
What Sam can do is give a heads-up on where gasoline prices are moving.
He needs to operate on very thin supply margins. Too much - or too little - gasoline means sacrificed income; unused product in the first case, sacrificed sales in the second.
So Sam has worked out an arrangement with his local "big boy" truck supplier (ok, it's the husband of his only sister) to receive his weekly shipment on Thursday. The bigger outlets get theirs on Saturday. He can better gauge station needs with a delivery during the week, he tells me, rather than on the weekend. And he passes on the wholesale cost to his customers with a standard markup (averaging about 6% in the local market over a standard year).
He is my perfect barometer for the local gasoline market.
The price posted at his place on Thursday is essentially the price going up everywhere else - two days later. Aside from the now-quite-infrequent gas wars, or restrictions some places still have on self-service pumps, Sam gives me the market for the week to come.
And 48 hours to do something with the information.
An 'Early Warning System' For Gas Prices
Sometimes I negotiate client payments for my services in something other than money - stock options, discounted product volume, market access, or other unusual forms of compensation.
Sam provides me with something else: Pure market intelligence.
For several years now - by plotting the advance notice he gives me - I have been following a broader, multi-state area of retail sales. And I'm beginning to compare regions.
Two days doesn't sound like much. Yet having even a slight advantage allows me to factor change into a frequently revised model that projects pricing before it hits the market. In this way, I can equate it to refinery runs, crude-oil differential supplies, and spreads between futures contracts in gasoline and several exchange-traded funds (ETFs) following that trade.
With a retro calculation from retail sales to sourcing and then comparing the resulting patterns, I received early warning of the retail price hikes in 2008, but was not positioned at the time to take full advantage of what was happening in the energy markets.
Going forward - with our gasoline-price-forecasting model - it will be different.
With our gasoline-price-forecasting model, I can now tell who is likely to benefit first and where the pops are going to hit. Because demand is coming back, the retail sales and pricing patterns are again developing, and the current rise in crude prices is only the early indicator.
It's interesting, sometimes, to look back upon our sources of inspiration. In this case, what began as an intellectual exercise has turned into a model for imminent crude-oil profits. And to think ... this new and clearly robust gasoline-price-forecasting model all came about because of a routine stop to fill up my gas tank.
[Editor's Note: Dr. Kent Moors, a regular contributor to Money Morning, is the editor of "The Oil & Energy Investor," a newsletter for individual investors. In a career that spans 31 years, Dr. Moors has been consulting the energy industry's biggest players, including six of the world's Top 10 oil companies and the leading natural gas producers throughout Russia, the Caspian Basin, the Persian Gulf and North Africa. As the preceding interview so clearly illustrates, Dr. Moors' experiences - as well as the unrivaled industry access, contacts and insights he possesses - are the backbone of the Energy Advantage, an energy-sector advisory service that enables investors to capitalize on his contacts and his global-energy-sector insights. For more information on that service, please click here.]
News and Related Story Links:
- Money Morning News Archive:
Dr. Kent Moors News Stories
- Money Morning Special News Report:
Special Report: New CEO Dudley Isn't the Long-Term Answer at BP, Expert Says
- Oil Price Information Service:
Official Website (About Us Page)
- Money Morning Special Report:
Why You Should Worry About the Iran Oil Sanctions
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.