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From oil well to gas pump , prices jump at every stop By the time gasoline arrives at local service stations, it has taken a long -- and expensive -- journey.

By BOB WYSS and ARIEL SABAR Journal Staff Writers .12.2000 00:14:19

PROVIDENCE -- Anthony Russo's family has been selling gasoline almost as long as Ford has been making cars. He knows how people respond when gas prices soar.

Just last week, a clerk greeted a customer with a simple ``Hi, how are you?'' The customer didn't miss a beat: ``Lousy, with these gas prices.''

Russo stood outside his Sunoco station in Olneyville and shook his head. ``We get blamed -- ``Why is the price going up?' '' he said. ``But we have nothing to do with it.''

As gas prices have climbed to their highest level since the Gulf War, many motorists are asking why. It's a question that probably will grow more vexing as prices continue to rise through the summer.

The answer is complicated. But one thing is certain: By the time gas is pumped into cars at Russo's station, it has been on quite a journey.

In all probability, that journey began two months earlier and thousands of miles away in an oil field in West Africa's tropical Niger River Delta, where Sunoco gets most of its oil. The crude oil is hauled by tanker across the Atlantic, traded on a commodities exchange in New York, refined into gasoline in a Philadelphia plant, shipped by barge to an East Providence tank farm, trucked to Russo's station and then taxed by the state and the federal government.

The price on the sign outside Russo's Friday -- $1.50 a gallon for regular unleaded gas -- is a complex mix of costs picked up along that voyage. But analysts say that the biggest factors in the recent runup in gas price were decisions made months ago by oil ministers in lands far away.

LAGOONS, MANGROVE SWAMPS and about 250 small oil fields dot the Niger River delta in Nigeria, where oil accounts for 90 percent of all exports. The oil drillers there are corporate giants: Royal Dutch Shell, Exxon Mobil, ENI/Agip and Elf Aquitaine.

In the late 1990s, when prices fell to less than $10 a barrel, the oil business looked more like a curse than a blessing. Nigeria's economic problems worsened. So did political unrest.

Then, on March 23, 1999, Nigeria and the 10 other members of the Organization of Petroleum Exporting Countries voted to cut oil production by 1.7 billion barrels a day.

It would be months before anyone in Olneyville or anywhere else would see prices rise at the pump. But analysts say the vote was pivotal. By last week a barrel of crude was selling for $34.20, and gas prices were heading to their highest levels since Iraq invaded Kuwait a decade ago.

``The significant increases in gas prices we've seen this year are ultimately a result of significant reductions in the supply of world oil,'' said David W. Costello, an economist at the U.S. Energy Information Administration. ``The main reason is that the principal raw material for making gasoline has seen its price go up a lot.''

That has been good news for Nigeria. Forecasters say the country will export about 1.8 billion barrels of crude this year, the same as in 1999. Revenues, however, will climb from $12 billion to $18.5 billion, a 54-percent increase. Th companies that drill for crude there, including Shell and Exxon Mobil, will also make a tidy profit.

Sunoco and other refiners bid for Nigerian crude on the New York Mercantile Exchange, where oil is hawked along with sugar, copper, soybeans, hogs and other commodities.

An oil tanker disembarking from Nigeria plies the Atlantic for two weeks before delivering Sunoco's purchases to its refinery in Philadelphia.

Sunoco gave up a century of oil exploration in the 1990s to focus on refining and marketing. But it has always fashioned itself as more of a marketer than a producer of oil. Years ago it even dyed some of its gasoline blue as a marketing gimmick.

But blue dye or not, the company's prices hinge heavily on the price of crude oil. And they can be pushed and pulled by everything from equipment breakdowns, new regulations, increased competition and bad weather.

It was the glut of gasoline and heating oil -- mostly a result of two consecutive warm winters and cheap crude oil -- that dampened Sunoco's prices and profits last year. ``Last year was just an awful time for the company,'' said James L. Van Alen, an investment analyst with Janney Montgomery Scott in Philadelphia.

When crude prices started to rise after the OPEC vote, many refiners started to sell their reserves of gasoline rather than produce more by buying more crude.

As a result, the amount of gasoline in tank farms, refineries and pipelines fell over the past year from nearly 230 million barrels to about 200 million barrels. That's a 30-year low.

``If you get below 185 million, you start really, really worrying about it,'' said Costello, of the Energy Information Administration. ``Where we are today is not a crisis.''

Still, the decline in gasoline reserves has pushed crude and gas prices ever higher, in large part because of simple supply and demand. Relief isn't likely unless OPEC nations vote at their March 27 meeting to boost production levels, as they have hinted they will.

Analysts believe OPEC will increase production. And they predict that Sunoco will more than double its profits this year. One reason is that gas prices will take time to respond to the drop in crude prices, allowing the company to reap larger margins just as the busy summer driving season hits its stride.

``OPEC is going to open the gates just at a time when people don't expect the prices to go down, because they traditionally rise as the driving season continues,'' said Van Alen, the analyst with Janney Montgomery.

SUNOCO'S PHILADELPHIA refinery takes five days to turn crude oil into gasoline, jet fuel, lubricants and chemicals used to manufacture everything from clothing to crayons.

From there, gasoline is loaded onto barges that are towed out of the Delaware River and up the coast into Narragansett Bay, a voyage of two days. The barges dock at an East Providence tank farm managed by Exxon Mobil and empty their loads into tanks on the sprawling property off the Wampanoag Trail. A Sunoco tanker truck fills up there and delivers gas to Russo's about every other day.

There, taxes boost the gas price sharply.

The federal government tacks on 18.4 cents per gallon; the state, 29 cents. Rhode Island has the fifth-highest gas tax in the nation. It is less than Connecticut's, which tops the country at 32 cents, but more than Massachusetts's 21.5-cent tax.

At this point in the journey, Russo says, he only has so much leeway in setting prices before he loses out to competitors. He says he marks up midgrade and premium gas by 5 to 10 cents a gallon. But he says he has been selling regular unleaded at cost, which has kept his prices below the state average.

He is betting that the lower price for regular will lure customers, who he hopes will buy something in his convenience store, have their car repaired at his garage, or perhaps trade up to a higher grade of gasoline.

``Margins get pretty darn tight when the prices goes up like this because they're fighting to keep customers and stay competitive,'' said Daniel F. Gilligan, president of the Petroleum Marketers Association of America, a trade group with a membership of 8,000 wholesale and retail gas dealers nationwide. ``They know that if the guy down the street cuts his margins to try to squeeze one or two more pennies out, then he has to cut his.''

In times of volatile prices, Gilligan said, service stations tend to cut regular unleaded prices to the bone and rely more on sales from their convenience stores and garages. Which isn't necessarily the end of the world. According to the Service Station Dealers of America, another trade group, gas sales account for just one third of profits at many gas stations.

``Some people say they're selling gas at cost right now,'' Gilligan said. ``Now they're simply living off what they can sell off candy bars in the convenience store.''

But all the explanations in the world may not make much of a difference to motorists, who only know that their wallets have felt a little bit lighter this month.

Bill Jarbau was the man who drove into Russo's Auto Service last week and said that the gas prices were making him feel ``lousy.''

Jarbau, 45, of Johnston, lives on $600 a month in disability payments. He has been spending a lot less time behind the wheel these days and has all but given up his hobby of ``joyriding.''

``It's just to the store and back, to the doctor's and back, that's about it,'' he said, before getting back into his pickup truck, where his mother, Bria, and pit bull Max, were waiting. ``I stay home a lot more, play a lot more cards than I used to.'' Add on this topic

Copyright ) 2000 The Providence Journal Company

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-- (Dee360Degree@aol.com), March 12, 2000