Local Drivers Enjoy Effect of Oil Price Drop

Alvaro Puerto climbed a slippery ladder in the rain to post lower prices on the sign at his Exxon service station.

Puerto’s station at Washington and Crenshaw boulevards in Los Angeles now charges 91.9 cents a gallon for regular leaded gasoline and 99.9 cents a gallon for regular unleaded. Puerto has been climbing his ladder every few days recently, as gasoline prices have slipped 2 to 4 cents a week.

“They’re very happy, the people, to see the very low prices,” Puerto said Thursday.

Local motorists are finally beginning to feel the effects of the sharp drop in oil prices that began in late November, with some service stations now selling gasoline at the lowest prices since the 1979 Iranian revolution.

Not all stations are charging 91 cents a gallon for leaded regular. So far, the lowest prices are often seen at high-volume, independently owned stations that are able to buy large quantities from cheaper suppliers. However, observers say prices in Southern California generally are down by more than 6 cents a gallon over the last several weeks.

Oil industry analysts believe that prices will continue to tumble by as much as 10 cents a gallon in coming weeks, but they note that it is not likely that gasoline prices will ever reflect the full 50% drop in crude oil prices in the last two months.

The reasons are many, including reduced competition among refiners, fewer service stations and an attempt by refiners, station operators and others--all of whom have been squeezed in recent years--to take some of the benefit of lower oil prices.

“There has been a very sharp drop in gasoline prices . . . but I’ve read a couple of letters from people who think the bottom should drop out.” said Al Greenstein, Atlantic Richfield’s manager of media relations.

“There are a lot of factors that go into the price of gasoline other than the price of crude oil,” he said.

Many refiners are still processing stockpiles of more expensive crude oil bought before the price decline began, analysts said. In addition, not all types of crude oil have dropped in price as far as that sold on the “spot” market, where oil not produced on long-term contracts is sold. Such spot market oil makes up a relatively small percentage of the oil refined into gasoline, they said.

Follows Prices

The price of gasoline is responding to the drop in crude oil prices, but the decline will not be of similar magnitude, said Dan Lundberg, president of the North Hollywood-based Lundberg Survey, which follows prices at 17,000 service stations around the country.

The price of regular leaded gasoline at self-service stations in the greater Los Angeles area fell 5.33 cents a gallon to 97.29 cents a gallon as of Lundberg’s Feb. 7 survey from $1.0262 on Dec. 20, before crude oil prices plunged dramatically. Regular unleaded fell to $1.0635 a gallon from $1.1178.

Prices have declined even more since that survey, Lundberg said. The local survey covers 1,700 stations in Los Angeles, Orange, Ventura, Riverside and San Bernardino counties.

Prices in San Diego tend to run 1 to 3 cents higher a gallon than in Los Angeles, said Steve Shelton, executive director of the Southern California Service Station Assn.

Nationwide, the average price of all grades of gasoline fell to $1.1564 a gallon on Feb. 7 from $1.2120 on Dec. 20. Regular leaded gasoline dropped to $1.0275 from $1.0888, while regular unleaded hit $1.0973 from $1.1846.

Lead Regulations

Despite falling oil prices, overall gasoline prices nationwide actually increased from year-ago levels, reflecting higher dealer operating costs and increased refining costs because of a change in lead regulations, Lundberg said. In February, 1985, the overall price of gasoline nationwide was $1.1382 a gallon, or 1.82 cents less than on Feb. 7, Lundberg said. In the Los Angeles area, however, prices a year ago were higher.

While retail prices fell 4.6% nationally from December to February, wholesale prices, excluding taxes, dropped 12.2%. As a result, a service station operator’s overall margin jumped to 16.74 cents a gallon from 11.79 cents a gallon, Lundberg said.

“But you’re playing with dynamite if you think all of the dealers’ operating margin is going into their pocket,” Lundberg said.

Service station operators have had to suffer through higher rents, labor and liability insurance costs in recent years, Lundberg said.

“That explains why there won’t be any major price wars in the nation--not here and not in any other city in the nation,” he said.

Dealers have not made bigger profits yet, said Vic Rasheed, executive director of the Washington-based Service Station Dealers of America. Instead, Rasheed blames the relatively slow drop in gasoline prices on a decline in competition, because of oil company mergers and the closure of many independent refineries.

Increased Margins

“So far, I think (major oil refiners) are hanging onto their increased margins of profit,” Rasheed said. “Until they turn it loose, I don’t think we’re going to see much more” at the gas pump, he said.

Gasoline prices also reflect increased refining costs to produce gasoline with less lead as ordered last year by the Environmental Protection Agency, Greenstein said.

“That’s serving to some extent to retard the decrease in pump prices,” he said.

Refiners, service station operators and all the middlemen may try to hold onto their profit margins, “but it’s going to be short-lived,” said M. Craig Schwerdt, an analyst with Morgan, Olmstead, Kennedy & Gardner, an investment firm in Los Angeles.

“It’s a competitive business,” he said.

“It’s a slow process,” said Bill Floyd, manager of marketing and product supply at Tosco, an independent refiner based in Santa Monica. “Everyone wants to hold onto their profit margin as long as they can.”

Pump Prices

George Naniche, manager of the price division in San Francisco-based Chevron’s economic department, said pump prices have lagged behind oil prices, in part, because “the whole industry is still sort of surprised by what happened.”