Tag: fudge factor

Expected Price Calculation

Expected retail price = 1.06*(WP + RM + FF + TX + MS) + ST

WP = estimated wholesale price
(average of current and next month futures prices)

RM = estimated retail markup (as much as 20 cents per gallon)

FF = Fudge factor, which takes into account variations between New York and Chicago wholesale prices, and competition situations (can vary from -10 to 25 cents)

TX = federal gasoline tax per gallon (18.4 cents per gallon)

MS = miscellaneous (middlemen, freight, and storage fees, about 3 cents)

ST = state gasoline tax per gallon (19 cents per gallon, not subject to state sales tax)

Notes: Multiplying by 1.06 takes the state sales tax into account. As RM goes down over several days, the likelihood of a price hike increases. Retailers pre-pay 12.7 cents per gallon of the Michigan sales tax when the receive a new shipment of gasoline and the rest after the sale. Credit-card sales cost retailers about 3% of the retail price, which comes straight out of RM.

Please ship some extra gasoline to the Midwest

Friday, May 11, 2007, 1:30 PM:  Looking at the price hikes of 5/3 (to $3.25) and 5/10 (to $3.29), it is as if the margin retailers are using has jumped from 20 cents to 50 cents.  That, of course, isn’t true, and we can tell from the fact that prices did not drop down into the $2.80’s before yesterday’s hike.  So, the more likely situation is that we still have the 20-cent margin, but the “Fudge Factor” right now is an unprecedented 30 cents.  That is, there is a 30-cent differential between the NYMEX estimate of the wholesale price and the actual wholesale price in the Midwest.  This is consistent with what we are seeing on the national gas price map.  Sadly, NYMEX prices jumped several cents yesterday, which means that while prices will naturally fall a bit over the weekend, they won’t fall very much.  And then we’ll see how things look early next week.

RB Contract… ?

As I have posted before, the most difficult part of studying gas prices is figuring out the wholesale prices. I use the NYMEX “HU” unleaded gasoline contract as a proxy, because I don’t have access to the wholesale prices in west Michigan. Lately, I’ve also been observing the “RB” gasoline w/ethanol contract, which has been a better predictor the past few weeks, except for the past few days. This week’s rise to $2.95-$2.99 makes sense if you go back to the “HU” contract and set the “Fudge Factor” to zero. Another theory is that Speedway and others are tense about posting a price above $3 a gallon, and are selling gas near cost to keep the Governor happy. This morning, NYMEX gas prices are down, but that could change, so it is difficult to see what happens over the next few days. The crystal ball is foggy. Prices fell to as low as $2.80 around town over the weekend, then re-set to $2.95 on Tuesday at most places.

Prices slightly lower

NYMEX prices have gone down the last few days, and the end of the March contract seemed to have helped, too. This morning, we are looking at wholesale prices of about $1.87. That corresponds to a 20-cent margin price (with no Midwestern premium tacked on) of $2.61. With the recent fudge factor of about 8 cents due to living here rather than elsewhere, we get a range of $2.48 to $2.69. Low price in town this morning is $2.60. So, I see more room to fall and don’t see a price hike coming today or tomorrow. By Thursday, of course, the situation could be very different. I was CORRECT about no price hike on Tuesday or Wednesday, but didn’t have time to post before the price hike on Thursday to $2.79.

Could have been worse

I was suprised that last Wednesday’s price hike wasn’t worse, given past history. Also, seeing prices in Grand Rapids and Detroit (where I visited last weekend) in the mid $2.20’s makes me wonder why we are getting such a discount right now versus the New York Unleaded (NYMEX) prices. I’m not complaining, but it makes it harder to predict a price hike, when you don’t know where the bottom is. But, factoring a 12-cent “fudge factor” discount, retailers must be paying $2.20 right now, so on the Northeast side of town, we are at the bottom right now. So, the crystal ball says a price hike this week, but maybe not until Thursday, with a new price in the $2.40’s or $2.50’s. Early Wednesday, I took back this prediction.

Wednesday, November 30, 2005

9:00AM: The dramatic slide in wholesale gasoline prices that started at the end of August is continuing this week. Wholesale prices are a dime a gallon lower than a week ago, meaning the 0-cent margin price is $1.88 this morning (factoring in a -4 cents fudge factor that emerges every year at this time). Since prices in town range from $1.99 to $2.16, I predict further retail price drops this week and no price hike. We got through Thursday with no price hike, and I thought we were safe, but on Friday, prices rose to $2.19, so the prediction was WRONG.

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