Fuel sellers are keeping an eye on the uptick in gasoline prices as the U.S. rolls toward its summertime peak driving season.
High gasoline prices are a double-edged sword for warehouse-style retailers such as Costco Wholesale Corp. and for fuel-producing companies like Valero Energy Corp. While higher prices at the pump bring higher revenue from fuel sales, they can also deter consumer confidence and discretionary spending. At some point, Americans also will cut back on driving.
Monday's release of data on U.S. retail gasoline and diesel prices comes at a key time of year, when refiners and retailers look to gauge how much they will need to ramp up. The Energy Information Administration report is expected to show that U.S. gasoline prices have increased from last week's average of $3.684 U.S. for a gallon of regular. That is the highest that prices have been at this time of year, according to EIA records back to 1990.
It isn't all grim news for U.S. drivers, especially in the Northeast. This is the week when important equipment at Sunoco Inc.'s big refinery in Philadelphia is set to be back on line and producing gasoline after an outage of at least a month. PBF Energy's plant in Delaware City, Del., is supposed to resume operations in May. This expected surge in gasoline production may be enough to cap fuel prices, however, but not lower them.
Faced with rising prices, drivers are gravitating to low-cost options. Taken together, Costco, Wal-Mart Stores Inc. and BJ's Wholesale Club Inc. have about 755 gas stations in the U.S., less than 1% of the 118,000 in the country as of 2007, according to the latest U.S. Census data available. But by using few station attendants and other cost-cutting measures, they can often sell fuel at lower prices than neighborhood competitors.
Between Costco and Wal-Mart, the two largest U.S. wholesale retailers, Costco has the highest percentage of its stores selling gasoline. Two-thirds of Costco's 512 stores in the U.S. and Canada have gas stations selling fuel at prices at or below others in the same neighborhood, said Costco Chief Financial Officer Richard Galanti. That gets foot traffic in an environment of rising fuel prices and partially offsets fewer items being sold.
Costco expects to fetch nearly $8 billion U.S. in gasoline sales for the year ending Aug. 31, 2011, Mr. Galanti said, adding that current-quarter sales are up 30% on the year. Gasoline will most likely be 9% of Costco's total revenue for the year, he said.
Wal-Mart sells gasoline only at its Sam's Club subsidiaries, a segment that constitutes about 11% of Wal-Mart's total revenue. That means Wal-Mart will have to ratchet up its already legendary operating efficiency to offset higher transportation costs, said Bill Simon, the company's president and chief executive.
Otherwise, Wal-Mart will have to hope that gas prices increase enough to persuade shoppers to pass up other stores, he said.
Higher fuel prices pose less danger to the bottom line of refiners such as Valero, which directly operates about 1,000 gas stations in the U.S. and licenses its brand to 4,800 more. Although the refining segment's profit margins shrink when oil prices are high, refiners can make up for it by pushing sales of items inside their convenience stores, said a Valero spokesman.
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