Economic Outlook - January 2006

Why Tar Heels got hosed at the pump

Looking for reasons why gasoline prices here are so much higher than a year ago and so much higher than in neighboring states? Blame speculators, refinery-ravaging hurricanes, the state’s motor-fuel tax and yourself, says Gary Harris, executive vice president of the North Carolina Petroleum Marketers Association. And here’s a tip for handling the next crisis: Do as he says, not as he did.

BNC: What happened after Katrina?

Harris: The gasoline pipelines coming out of the Gulf Coast were shut down. That’s something we’ve never had to deal with before — North Carolina being completely cut off. Katrina hit on a Monday, and we started receiving product late the following Wednesday or Thursday. We were supported only by existing inventory until that time. The Colonial pipeline is the most important source of product for southeastern states. It runs from Houston to New York, and the only refineries feeding it south of North Carolina are on the Gulf Coast. Gasoline runs north only in that pipeline, so all the southeastern states are in the same boat.

What specifically caused the price spikes?

The wholesale cost. We were getting changes in pricing from oil companies multiple times a day, which is very odd. Usually the price changes twice a day. What made it worse was speculation on crude-oil prices.

Why the speculation?

Just the concern that supply was going to be extremely tight or not there at all.

Was some of the increase unjustified?

The price of crude oil has been out of line since before Katrina. Demand has gotten supply so tight worldwide — that’s the driving factor in all the speculative markets. And yeah, the price they’ve bid it up to is higher than it should be.

Why are gasoline prices higher here than in neighboring states?

Price variances can be blamed a lot of times on tax. Our motor-fuel tax rate ranges from 12 to 20 cents higher than those of neighboring states. Other states have to vote on a motor-fuel tax increase. Ours is automatic. Whenever the wholesale price rises, our tax does also. We haven't had a decrease since January 2003, and it was only two-tenths of a cent. The last tax increase was 1.5 cents on Jan. 1, 2005.

Where does our motor-fuel tax rank?

We’re the fifth-highest in the nation at 27.35 cents a gallon. The highest is Rhode Island at 31 cents. We’re anticipating a significant tax increase on Jan. 1 of 3 to 4 cents a gallon.

Why is our rate set so high?

We have one of the largest state-maintained road systems in the nation. There’s always opposition to capping or curbing the tax because the state Transportation Department argues it needs the revenue for road maintenance. The other thing it argues is the inflationary cost of asphalt, which is a petrol product, plus steel.

Don’t other states maintain roads?

In other states, county taxes go for roads.

What about local competition?

Local competition plays a tremendous role in pricing. If you have a low-ball independent who prices at or below cost, prices tumble. Independents who usually drive prices down in a market have had a really hard time because they don’t have contracts with a major oil company for supply. It’s difficult for them to get fuel with the shortages caused by hurricanes Katrina and Rita, so there’s been no suppressing of prices.

Why are prices in Charlotte often higher than elsewhere in the state?

Charlotte is the last place in the state where major oil companies sell their gas directly to consumers, and company-direct outlets tend to price higher. Elsewhere, gas is sold by wholesale distributors, franchisees and mom-and-pop operations.

One report suggests Charlotte stations jacked up post-hurricane margins more sharply than those in other cities to make up for losses earlier in the year.

Prices in Charlotte followed the trend up, and they may have been a little slower in following the trend down. There’s no reason for it. The market will bear those prices going down slower in the Charlotte area.

What should consumers do if gas prices jump again?

Never panic. Panic causes a huge draw on inventories, and if there’s a problem replacing inventory it will drive prices up. After Hurricane Katrina, Gov. Easley asked people to drive a little less and conserve, and people panicked and started stockpiling. And then the price went up.

Admit it. When prices started going up after Katrina, you rushed out and filled your tank.

Oh, yeah. Everybody did.

You didn’t follow your own advice.

The only concern I had after Katrina was how long the pipelines were going to be down, which had never happened. If the pipelines are moving, there’s no need to panic.

So next time, even if the pipelines are down, you’re not going to panic?

I doubt that I would because I was amazed at how fast they had them back up.