How the price adds up

[Times photo: Skip O'Rourke] The HMI Petrochem moves to the Citgo terminal at the Port of Tampa recently to unload gasoline that started as crude in Venezuela.

At every stop along the way, a nickel here, a quarter there is tacked on in a complicated gasoline pricing game.

By JEFF HARRINGTON

© St. Petersburg Times, published April 3, 2000

TAMPA -- Pumping $20 worth of unleaded into his gas-craving Ford Explorer, John Tolodxi grumbles that the oil industry seems to be playing games at his expense.

"It's weird," he said. "Prices keep jumping up and then slowly start falling. I just don't understand it. It's like cigarettes: They know you have to have it so what can you do but pay up?"

Tolodxi and his fellow motorists have had plenty of incentive to speculate about who's getting rich as they shell out better than 50 percent more for a gallon of gas than a year ago.

In reality, the pricing game is much more complicated than Tolodxi would hazard to guess. Many of the players along the way are making less money and having less fun than he imagines.

The Citgo regular unleaded that Tolodxi pumped one recent afternoon probably began as crude tapped from the rich oil fields of Venezuela and sold at about 61 cents a gallon. It was refined in Texas, shipped through the Port of Tampa, sold for wholesale at about 86 cents a gallon and trucked to a gas station at Dr. Martin Luther King Jr. Boulevard and U.S. 301 in east Tampa.

Along the way, nearly everyone, particularly the tax collector, managed to add a nickel here, a quarter there. By the time Tolodxi filled his tank, he paid $1.51 a gallon.

Tracing Tolodxi's tank of gas back to its source is as tricky as retracing a raindrop's journey from a gully to the sea. Supplies of oil are mixed and traded along the way, making an exact accounting impossible. But here is the likely journey:

Venezuela
An underwater oil field

Petroleos de Venezuela, S.A. (PdVSA), the national oil company of Venezuela, has hit crude oil nirvana under Lake Maracaibo. Thousands of derricks protrude from its waters

Located in northern Venezuela not far from the Colombian border, the lake's oil-rich basin is enough to supply two-thirds of the country's output. All told, Venezuela sits on a staggering 75-billion barrels of crude oil reserves, the largest stash in the Western hemisphere.

Venezuelan crude is among the poorest quality in the world: thick, black and laden with contaminants. It's much more expensive to refine sulfur and other unwanted ingredients out of the heavy, sour crude than to refine so-called "sweet Texas crude." That's why heavier crudes trade $5 to $6 a barrel cheaper on the market than the sweet variety -- and in the past PdVSA sometimes couldn't find U.S. buyers able to refine it.

That problem was solved in 1986 when PdVSA bought a 50 percent stake in Citgo Petroleum, giving it a pair of large U.S. refineries able and willing to process heavy crudes. Four years later, the Venezuelan giant bought the rest.

The marriage works well, for the most part. Citgo receives a discount "buying" the crude from its parent; Venezuela always has somewhere to place its heavy volume of crude.

Problems surfaced on the Citgo side, though, when Venezuela and its fellow OPEC countries began cutting production of crude and prices tripled toward $30 a barrel. Unable to get an ample supply from its parent last year, Citgo turned to the open market for 20 percent of its supply. It spent more than expected and its profit margins disintegrated.

PdVAmerica, the holding company set up to operate Citgo, reported a 25 percent drop in net income last year to $146-million on $13.3-billion in revenues. In 1999, the company shelled out an extra $55-million for crude oil.

It wasn't the only refinery operator getting hurt.

"A lot of companies were losing money," said John Felmy, director of policy analysis and statistics for the American Petroleum Institute. "When you had crude oil prices up 140 percent and product prices up 70, the refinery sector is also getting squeezed."

By February, the price charged to Citgo dipped slightly to about 61 cents a gallon. A shipment from Venezuela to Citgo's refinery in Corpus Christi, Texas, includes the tankful destined for John Tolodxi's Explorer.

The petroleum is pumped aboard a double-hulled tanker for a routine, six-day voyage from the Caribbean Sea, through the Gulf of Mexico and into Corpus Christi Bay.

Corpus Christi, Texas
Ghost town refinery

Citgo Petroleum Corp.'s massive oil refinery complex looks like a ghost town of storage tanks, towering heaters and coolers and thousands of miles of pipes

Far from being deserted, the refinery is working at full capacity, refining blends of crude oil into gasoline, diesel and a smattering of petrochemicals. In all, about 4.2-million gallons of gas and 2.1-million gallons of diesel a day. Most of the work is manipulated electronically from a high-tech control tower a few miles away.

The new shipment from Venezuela will take more than 20 days to make its way through the maze. Some of it will wind up as petrochemicals used in everything from fertilizers to nylon stockings to soccer balls. Some will be converted into diesel or propane. The rest ("the scraps," as one Citgo worker put it) becomes gasoline.

At this stage of the game, pricing becomes a pure case of supply and demand.

Citgo uses spot market prices, the going rate on the open commodities market for huge quantities of gas, as a starting point to set wholesale prices in every market in the country that it reaches by pipeline, truck or ship. Shipping costs, weather conditions, the demand for a certain grade and environmental regulations all play a role in the price.

In the first quarter of 2000, profit margins at refineries like Citgo's have rebounded because they've managed to pass on more of their higher crude costs.

The HMI Petrochem
50 hours to Tampa

Gusts up to 30 mph whip through the refinery complex off Corpus Christi Bay as the HMI Petrochem is prepared at Dock One for its voyage to Tampa

It will take more than 18 hours this Friday morning to pump the Petrochem with its load: about 120,000 barrels of regular unleaded gasoline and similar amounts of other grades and diesel.

Sitting in a control room two miles away, Tom Gonzales monitors the process on his computer screen. A gauge shows the temperature and other measurements holding steady as the product (87-octane regular unleaded) flows into a tanker compartment at the rate of 5,351 barrels, or about 225,000 gallons, an hour.

Hvide Marine, the owner of the Petrochem, is under a long-term contract to shuttle gas from Texas to Tampa, a trip that typically takes about 50 hours. By Saturday afternoon, the voyage is underway.

Port of Tampa
Filling 250 trucks a day

It's late afternoon the following Tuesday and the HMI Petrochem is running behind schedule

The 625-foot tanker finally pulls into Citgo's terminal in the Port of Tampa about 7 p.m.

In the commodity business, where wholesale prices change daily, sometimes dramatically, keeping to a timetable is important.

Pipes snaking through the 26-acre site connect to 10 storage terminals that together can hold about 35-million gallons of gas and diesel. About twice a week a new shipment arrives, but it doesn't stay put long.

Buyers adjust their pick-up schedules to time the market right. After all, a 2 cent drop in the daily posting of wholesale prices will make a $170 difference for an average truckload of 8,500 gallons.

Unlike companies such as Hess and Exxon, Citgo doesn't own the gas stations that bear its name. It sells gas wholesale to branded stations that use the Citgo name as well as to chains such as RaceTrac and no-name operators.

Up to 250 tanker trucks load up at the terminal daily.

Some of the truckers work for entrepreneurs like Hulan Williams, who owns a string of Citgo branded stations throughout west Central Florida. Others work for distributors like Mike Convey, a middleman who shuttles gas to independent station owners and provides them with Citgo signs and materials in return for a profit up to a couple of cents a gallon.

On Wednesday morning, Convey needs another shipment for one of his busiest customers: Joe Martarella, owner of a 3-month-old Citgo station at Dr. Martin Luther King Jr. Boulevard and U.S. 301.

Convey calls on independent trucking firm Petrochemical Transport, which dispatches trucker Henry Pearo, or "Horsepower" as he's known to co-workers and friends.

Pearo positions his 14-wheeler under the "truck rack" at the terminal and goes about his business by rote. He connects three 4-inch diameter hoses to different compartments in the tanker, walks into the "doghouse" booth, swipes a magnetic-striped card and punches in his request for the day: 4,000 gallons of premium diesel and 4,000 gallons of unleaded.

Citgo's wholesale price of 85.64 cents a gallon this day -- the price "at the rack" as it is called -- doesn't show up on the printout Pearo receives. But it does show up in Citgo's computers in Tulsa, which automatically debit the amount out of Convey's account that day.

On top of paying a penny to 1.5 cents a gallon for trucking costs, Convey has been hit by two or three surcharges in the past few months to reimburse Petrochemical Transport for rising transportation costs as its own gas prices have gone up.

Convey's profit margin, typically less than 2 cents a gallon, isn't affected. He passes the surcharge on to the gas station dealers.

"My dealers, they're the ones that are feeling the pain," he said. "When they've tried to increase their prices, they've lost volume and store sales. In other cases, they've eaten the price change and lost margins on gas to make it up elsewhere.

"I look at my receivables very closely," he added. "I worry about these people going under."

In the past few months particularly, Convey has fretted about the price wars that consumers don't see: gas station owners undercutting their competition by selling at or below cost. In general, that's easier for oil companies like Exxon that own their own gas stations. Independent station owners don't have that luxury.

To Convey, the price cuts are just a ploy to gain market control.

"When they get rid of the little guys like me and the small dealers and they get the market to themselves, that savings of 2 or 3 cents you enjoyed won't be there," he said.

The Citgo station
Profits from the coffee

[Times photo: Thomas M. Goethe] Denny Wakely fills his truck tank at the Citgo station at Dr. Martin Luther King Jr. Boulevard and U.S. 301 in Tampa.

Pearo pulls off Dr. Martin Luther King Jr. Boulevard into the Citgo station, puts on his gloves and quickly goes to work. Using a 143-inch long stick, he checks how full each underground storage tank is before he starts reversing the flow of gasoline out of his tanker

Station owner Joe Martarella isn't hurting for customers, even though his retail price of $1.509 for unleaded is 4 cents higher than what BP and Exxon are charging down the street.

Like many in his business, Martarella is slower to mark prices down when he gets a break on wholesale gas because he is trying to make up lost ground. He says he is seeking a profit margin of about 7 cents a gallon -- compared to 3 cents for his competitors -- just to make up for break-even days the month before.

"We got killed in February," said. "During the whole month, we were selling (gas) at cost just about every day."

With state, county and federal taxes added to the wholesale price, gas station owners have been facing a starting price in the $1.40 range before they tack on any profit. In February, Martarella said, he marked prices up by just 2 or 3 cents from what he was charged. But that was eaten up by costs of up to 3 cents a gallon on purchases made by credit card, leaving zero profit.

Fred Rozell, who follows retail prices for the Oil Price Information Service, said gas station margins have improved slightly to about 7 cents a gallon in the past few weeks but many owners are still hurting from last year.

Like others, Martarella views gasoline as a loss leader at times, using it just to drive people into his store. The convenience store operation, at 5,000 square feet, isn't your typical gas station eatery.

Fifteen pots of coffee sit on burners as three deli workers and an in-house chef prepare for the day's lunch crowd. Besides a deli and store, Martarella has a drive-up ATM, a propane-filling service, a car wash and truck repair shop. All of them have potential to be bigger profit centers than the gas pump.

The Citgo station
Fill 'er up

It's shortly after noon Wednesday as John Tolodxi pulls into the Citgo station in his white Explorer and starts his weekly routine, a fill-up of $20 worth of gas.

A couple seconds into the routine, he nearly drops the gas handle, startled that Shania Twain is singin' and struttin' on a six-inch video screen on top of the pump.

"So that's where all this extra money is going," he laughs. "I wondered."

Tolodxi grins briefly at the latest in pump frills, then frets some more about his struggle to stay on a $20-a-week budget for gasoline. That amount used to fill his tank but now leaves it a fourth empty.

His goal: to keep his credit card payouts for gas the same so he can pay off the balance every month. The folks setting gas prices may not need consistency, he said, "but I sure do."

-- Times researcher John Martin contributed to this report.

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