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Gas nearing $3 because — well, it's complicated
Kentucky Herald Leader
By Jennifer Hewlett
April 15, 2006

Whether fuel tops $3 a gallon in Kentucky this summer is anybody's guess, but drivers here might have it better than drivers in other states for several reasons:

• State taxes and fees on gasoline and diesel fuel are lower here than in most other states.

• Most of the fuel in the Bluegrass state comes from Midwest refineries that charge a few cents per gallon less than suppliers elsewhere.

• Competition among wholesalers and retailers may be a little fiercer here than in other parts of the country, experts say.

Kentuckians living outside the Louisville and Northern Kentucky areas will also tend to find gas 5 cents to 10 cents per gallon cheaper than their neighbors in those highly populated areas, experts say, because gas stations the Louisville and Northern Kentucky areas are federally mandated to sell more expensive reformulated gasoline to comply with environmental standards.

Yesterday, the average price of a gallon of gasoline was $2.80 in the Lexington area and $2.76 statewide, said Ann Belcher, a spokeswoman for AAA Blue Grass/Kentucky.

Experts cite several reasons for the recent spike in gas costs, including war and unrest in oil-producing countries; the prediction of another strong hurricane and tropical storm season; a change in seasons; laws and regulations; and greed.

"I believe that at the refinery supplier level the cost the wholesalers pay to refinery suppliers is excessive in some cases," said Richard Maxedon, executive director of the Kentucky Petroleum Marketers Association, pointing to Exxon-Mobil's record $36.1 billion in profits last year.

Last year, a prime culprit for gas breaking the $3-a-gallon barrier was Hurricane Katrina and other hurricanes that battered the oil-producing areas of the Gulf Coast.

"I don't know what it is this year," said Darrell Burgin, owner of Burgin Oil in Anderson County, a wholesaler who sells fuel to customers in Mercer, Boyle, Fayette, Woodford, Anderson, Shelby, Scott and other counties. "Everybody wants a profit, I guess."

The volatility of the oil market makes estimates about prices this summer anyone's guess.

"Obviously there's conflict going on in Iraq. There is concern about Iran. There have been attacks on Saudi oil pipelines. There have been concerns about civil unrest in Nigeria," said Ken Troske, professor of economics at the University of Kentucky Department of Economics and director of the UK Center for Business and Economic Research.

Also figuring into the picture are an increased demand for oil in China, laws and regulations pertaining to fuel blends and additives, Gulf Coast oil platforms and refineries that have not completely recovered from last year's hurricane damage, and the advent of summer driving season, he said.

"It's really complicated," Troske said. "There are a lot of different things that are changing simultaneously that make this a difficult problem ... and it makes it difficult to point to any single factor."

In recent months, mandated changes in fuel content for environmental reasons have caused pump prices to rise, experts say. Since 2004, the nation has been phasing in tougher limits on sulfur in fuel. Refineries also have been dropping the octane booster methyl tertiary butyl ether.

The corn-based additive ethanol is being used as a replacement for MTBE. The substitution of ethanol has put pressure on the ethanol market, making it more expensive, and has caused a slowdown in gasoline production, experts said.

Ethanol is used in much of the gasoline sold in Kentucky, Maxedon said.

Any kind of change in equipment and products used in refining oil affects prices, said Ray Jesse, a manager at Franklin-based Service Transport Inc., which transports about 350,000 gallons of fuel a day to customers throughout Kentucky and southern Indiana and in part of Tennessee.

"They get so many products that we've got to keep track of, keep separated, it's pitiful," he said. "It's a tough business to understand. ... It gets really complicated if you get into it."

Oil companies, wholesalers and retailers are also switching from winter blends to summer blends. In Kentucky, the deadline for that changeover is June 1. Retailers cannot put summer blends into tanks that contain winter blends, meaning supplies could go down for a while as the retailers sell off their remaining winter blend fuel.

"Kentucky is in a better position (cost-wise) than most other states because Kentucky's supply of gasoline comes predominately from Midwest refineries owned and operated by Marathon Petroleum Co.," Maxedon said. Also, "our gasoline tax is a little lower than most of the other states in the country."

In August 2005, only seven states had non-federal gasoline taxes and fees lower than Kentucky's, according to the American Petroleum Institute.

For the first and second quarters of this year, Kentucky taxes and fees on gasoline for highway use amount to 18.5 cents a gallon. For special fuels for highway use, including diesel fuel, the amount is 15.5 cents per gallon. At the beginning of the third quarter, the amounts could increase to as much as 19.7 cents and 16.7 cents, respectively, according Jim Oliver, director of the state revenue department's division of miscellaneous taxes.

Unlike some other states, Kentucky does not charge a sales tax and does not permit local option taxes on fuels for highway use.

In addition, Maxedon said, there is "tremendous competition" among the more than 3,600 retail fuel outlets and about 270 licensed wholesale fuel dealers in the state, which helps keep prices in check.

Also, unlike some other states, Kentucky does not prohibit dealers from selling fuel below costs.

"They many times are losing money on every gallon they sell," Maxedon said, "hoping you'll come in and buy a snack they can make some money on."

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