Gas Prices

June 3, 2010

Transcript:

Ted Simons:
You might have noticed gas prices dipping at the pump recently, which is kind of odd during the summer driving months. There's also a big oil leak in the Gulf of Mexico that doesn't seem to be affecting prices. Here to talk about all this is Michelle Donati, of Arizona Triple A. Thanks for joining us.

Michelle Donati:
thanks for having me.

Ted Simons:
Why are prices decreasing when the summer driving season is starting?

Michelle Donati:
You know, that's really atypical for prices to decrease heading into the summer driving months. Actually, over Memorial Day weekend we saw prices go down when typically they go up. That was the first time that happened since 2005. So a couple of reasons for that. One, inventories are healthy. Supplies are very healthyLy, fuel inventories are sitting at about a 17-year high. So that's one of the things. Also, there's been some pressure applied to crude oil as a result of some economic concerns in Europe. So that's driven down the price of the euro, therefore helping the price of oil go lower.

Ted Simons:
And I would imagine I've heard as well with the debt crisis over there may be killing demand a little bit as well. Correct?

Michelle Donati:
Right.

Ted Simons:
Concerns over the economy.

Michelle Donati:
Exactly. There's also been negative economic reporting out of China recently that's also applied downward pressure to prices, and in addition to that, we've seen profit margins for retailers have been very healthy. So typically during the summer months retailers use gasoline as a loss leader. That means that they will take a hit on the price of gasoline just to get people to come into their station and buy those convenient items, right now profit margins are healthy, which means that stations can afford to move prices lower to be more competitive.

Ted Simons:
That seems some what counter-intuitive. You think the gas station might be in trouble so they're raising prices, not necessarily the case.

Michelle Donati:
Not necessarily the case.

Ted Simons:
OK. Before we get any further, where do we stand right now? Here in the valley as far as gas prices are concerned?

Michelle Donati:
Right now Arizona's fuel price assist $2.72 a gallon. We've seen a drop over the last week of about three cents. Where we stack up to come -- compared to last year, we're higher by 35 cents.

Ted Simons:
Why is that?

Michelle Donati:
Last year a couple of things. We were experiencing -- we're coming down from a high price. So we were still kind of -- the environment was different than where we are this time last year. However, if you look at where we were this time last year just in terms of trends, we were trending upward, leading up to Memorial Day weekend.

Ted Simons:
It always seems as though Flagstaff has the highest, and Tuscon area has the lowest. Why is that?

Michelle Donati:
There's a couple reasons for that also. Flagstaff gets their fuel from -- there are two lines that bring fuel into Arizona. One to the east, one to the west. And so Flagstaff gets its fuel, it's shipped to Phoenix and then it's transported to Flagstaff. So there's additional transportation costs there. The bulk of fuel that comes in to Phoenix comes in from California, from the pipeline in California. The fuel that comes to Tuscon comes in from a pipeline that goes through the gulf. And so therefore there's not that additional transportation cost, and fuel tends to be cheaper in the southern part of Arizona. Tuscon in particular.

Ted Simons:
OK. If it comes through the gulf, there's a lot of activity going on right now in the gulf. Why is the fact that this disaster is happening down there not affecting gas prices?

Michelle Donati:
You know, the leak in the gulf has been happening, it's 40-plus days now. Initially there was a surge in the market once the explosion and the spill started. However, that quickly corrected itself and that's because this leak came from exploratory wells. So the market wasn't counting on the oil going directly into the market, it was an exploratory well. So therefore we've seen a minimal impact on prices, but where we could see some price effects in the long term would be clean-up efforts. Right now the spill is still happening, so clean-up efforts haven't been assessed or a plan hasn't been laid out for that. Should the government have to close a portion of the gulf for cleanup efforts once that plan is laid out, then we could see some long-term effects pricewise.

Ted Simons:
So this is not necessarily over as far as that particular incident is concerned. Also, the idea after moratorium, the president put a moratorium on offshore drilling will that affect prices and if so, when?

Michelle Donati:
This is kind of -- this is a recent announcement the president has made, and it's not going to impact the deep well operations. About 600 deep water well operations are currently in effect, or the thousand plus 500 feet operations in effect. But it will stop about 30-plus or minus exploratory operations. So minimal impact in the short-term, however, this will really be dependent upon whether or not the moratorium is extended beyond the six months, and also if we see any sudden spikes in demand, that could also cause a sudden shift upward, but right now both of those things are unlikely.

Ted Simons:
Something that's probably relatively likely is a hurricane coming through some of these areas, these oil-producing areas. Do we have supplies strong enough to withstand this kind of dissaster?

Michelle Donati:
Supplies are ample. Hurricane season comes once a year, last year very, very mild season. We had a couple of storms that were threats, but they didn't really do much damage. We're expecting a little more of an active season this year, and should a mild season come into play, the amount of supplies we have could really insulate the effects that we seen see in terms of pricing, but if we see a severe season happen or a severe event, it could be one storm, then obviously we could feel lasting effects.

Ted Simons:
With calm weather we should see an increase in prices not -- when? What should we see in the next two months?

Michelle Donati:
In the next couple months, barring unforeseen circumstances which should abmajor hurricane or storm that damages infrastructure, we should see prices continue on their current path with mid- to high $2 per gallon range.

Ted Simons:
Very good. Thanks for joining us.

Michelle Donati:
thanks for having me.