Wednesday, December 3, 2008

As Gas Prices Fall, Gas Stations' Profits Actually Rise; Lockheed Martin Wins Contract; U.S. Productivity Revised Higher; Treasurys Decline; Oil Futures Trade Lower Prior to Supply Data

As Gas Prices Fall, Gas Stations' Profits Actually Rise
By Paul Davidson, USA TODAY
December 1, 2008

Feeling sorry for gas stations as prices plummet? Don't.

Although retail gasoline prices have fallen 55% since mid-July, wholesale prices have plunged even more sharply — 68%, according to the Oil Price Information Service. As a result, retailers have enjoyed record profit margins since mid-September.

"Guess what? They're making substantially more money at $1.89 (a gallon) than they were at $4.29," says OPIS chief oil analyst Tom Kloza.

Last week, The Pantry, one of the nation's largest gasoline retailers, posted profit of $23 million in its fiscal fourth quarter ended Sept. 25, four times the profit of the year-ago period. Ben Brownlow, an analyst at Morgan Keegan & Co., expects even better results for the current quarter.

"We're happy, our customers are happy," says Jinger Duryea, president of C.N. Brown, which owns 108 gas stations in Maine and New Hampshire. "It's not costing as much to buy the product and store the product."

Most people think retailers clean up when prices rise and get pinched when they drop. It's just the opposite. When prices soared last spring, demand sank and stations couldn't pass along the entire increase in their wholesale costs.

Gross profit margins — the difference between wholesale and retail prices after taxes and freight — averaged about 9 cents a gallon vs. a typical 14 cents.

And with stratospheric gas prices, retailers' credit card fees, typically 2.5% of sales, were 10 cents a gallon. Toss in overhead, such as rent and labor, and most broke even or lost money on gas, though many offset that with convenience-store profits. The Pantry had a $5.1 million loss in the second quarter.

Now, with oil and wholesale gasoline prices tumbling, retailers can trim their prices more gradually. Per-gallon margins hit a record 60 cents on Oct. 7, averaged 45 cents in October and were 30 cents last Sunday, OPIS' Fred Rozell says. Plus, lower gas prices have cut credit card fees to 4.5 cents a gallon.

Sinking prices also bolster store sales. Some customers don't fill up, believing prices will fall further, and make more trips to the pump. "That's one more time a week the customer comes by to get coffee or a sandwich," says Jeff Lenard, spokesman for the National Association of Convenience Stores.

Not all retailers are cheering. Shaukat Zakaria, a partner in Lone Star Petroleum, which owns 30 stations in Texas, says the oil bust has dampened local consumer demand, intensifying price competition and cutting margins to 12 cents a gallon recently. The good times "didn't last very long at all," he says.

Lockheed Martin Wins Contract

Lockheed Martin Corp. has beaten out Boeing Co. for a $1.1 billion contract to build NASA's next-generation weather satellites, the company said late Tuesday. The Bethesda, Md., contractor will build two Geostationary Operational Environmental Satellite R-Series, or GOES-R. The current A2100 fleet consists of 36 satellites, with the first launch in 1996. NASA and the National Oceanic and Atmospheric Administration said the new series of satellites will result in more timely and accurate weather forecasts, directly affecting public safety and ultimately, economic health and development.

U.S. Productivity Revised Higher

The productivity of U.S. workers was slightly stronger in the third quarter than previously reported, the Labor Department said Wednesday. Productivity in nonfarm businesses increased at an annual rate of 1.3% in the quarter, not 1.1%. Unit labor costs, a key gauge of wage-price pressures, rose 2.8%, not 3.6%. In the past year, productivity has risen 2.1%, while unit labor costs are up 1.4%. Real hourly compensation fell 1.6%. In the nonfinancial corporate sector, productivity is up 3.5% in the past year, with unit labor costs up 0.2%, real hourly compensation down 1.2%, and unit profits down 6.7%.

Treasurys Decline

Treasurys declined Wednesday, pushing yields higher, amid concern that U.S. Treasury Secretary Henry Paulson is debating whether to ask Congress for the second installment of the $700 billion bailout package. Ten-year note yields rose 4 basis points to 2.73%, reversing some of Tuesday's strong gains. Yields remained higher on the day after the ADP national employment index said the U.S. private sector shed 250,000 jobs in November, the biggest job loss in seven years. The loss was in line with estimates of analysts surveyed by MarketWatch.

Oil Futures Trade Lower Prior to Supply Data

Oil futures traded near their lowest level in over three years Wednesday, as investors awaited the latest data on U.S. petroleum supplies due later in the session. Crude oil for January delivery was down 15 cents to $46.79 a barrel in electronic trading on Globex. On Tuesday, the contract ended down $2.32 to $46.96 a barrel on the New York Mercantile Exchange, the lowest closing level since May 20, 2005.

Sources: USA Today, Marketwatch

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