Nome gas prices drop by more than a dollar
After nearly a year of $5-a-gallon gas, the sign at Bonanza Fuel is advertising subsistence gasoline on sale for $3.699 a gallon. Up the road at Crowley the price is $3.75 a gallon.
Why the big drop?
The answer begins with April 20, 2020. On that day for the first time in history, West Texas Intermediate Crude was selling for zero dollars per barrel. Crude was free and before the week was over the price dipped as low as minus $37.63 a barrel. This meant that oil producers were willing to pay you $37.63 a barrel to take it off their hands. However, the benefit of low fuel prices that the Lower 48 consumers were enjoying is now slowly appearing in Nome.
The retail price of gasoline at the pump is determined by four main costs. They are the cost of crude oil, the cost of refining, distribution and marketing costs, and taxes. The price of crude oil is about 57 percent of the retail price, the largest component. Taxes are next biggest part, comprising about 17 percent on the national average. But because Alaska has the lowest gas tax in the country at just 8 cents a gallon, the tax is a smaller portion than in other areas. The national average is 55 cents a gallon, according to the American Petroleum Institute. The federal tax is 18.3 cents per gallon on gasoline and 24.3 cents on diesel. The City of Nome gets 5 percent sales tax, which is included in the price at the pump. Transportation costs are higher in Nome because the gas travels such a great distance and because it has to be lightered in from the tankers rather than unloaded directly from them. Refining cost is 10 percent of the price at the pump. Even if the crude is selling for zero dollars a barrel there are still significant costs going into the retail price.
So, the biggest component of the retail price is the cost of crude. What determines that cost? Mostly it’s a matter of supply and demand. The time of year and the complexities of the financial markets also have an impact. In Nome the price for the entire fall, winter and spring is set with the arrival of the final barge, sometime in November. The price will change when the first barge of the following season arrives as the price is determined on the day the fuel flows into Nome’s storage tanks.
The second quarter of 2020 was one of the worst on record for the oil industry. The COVID-19 pandemic knocked world consumption for a loop at a time when production was high. Storage tanks began to fill up. According to the U.S. Energy Information Administration consumption in April of this year was at a 30-year low. “Simply put, the demand destruction in the second quarter was unprecedented in the history of modern oil markets,” said Neil Chapman, senior vice president at ExxonMobil.
Shutting down the production of crude oil and closing down wells can’t be easily done. It can be hard to get a well back up and running if it has been shut down, so most producers try to avoid that scenario. They would rather pump at a loss than shut down. Although OPEC (Organization of the Petroleum Exporting Countries) agreed to lower production, the changes weren’t made fast enough to avoid the glut in crude oil. “The world’s most important commodity was quickly losing all value as chronic oversupply overwhelmed the world’s crude tanks, pipelines and supertankers,” wrote Bloomberg News in April. At the same time the pandemic hit, killing demand, and Saudi Arabia and Russia were locked in a price war. They brought record amounts of crude to market. A deal to slow production by 10 percent proved to be late and not enough. Constraints on storage capacity drove the price of futures contracts down. Nobody wanted oil when there was no place to put it.
Nome’s fuel is refined in the Far East: Korea, China or Japan. Tankers deliver it to Nome where it is transferred to smaller barges which bring it into the Port of Nome. “For the last five years and maybe longer the fuel that comes into Nome is typically purchased in the Far East,” said Bonanza CEO Scott Henderson. “Our current fuel supplier is Crowley. This year, we bought all of our fuel from Crowley.” Bonanza sells gasoline and heating fuel. They sell winter diesel, an ultra-low sulfer No. 1, a jet fuel with an additive to lubricate diesel engines. And they sell ultra-low sulfer diesel No. 2, a diesel for summer use. Bonanza does not sell aviation gas.
“Typically the taxes are based on what you’re using it for,” said Henderson. Boats, off-road, applications like construction work and mining pay a low rate. “What you buy out of the pumps is considered to be on-road diesel. That’s the highest tax structure.”
At Bonanza’s gas station at the corner of Seppala and Bering on Monday people were tanking up, filling 55 gallon drums and auxiliary tanks in pickup beds. It was time for moose hunting and that meant driving long distances. “Hopefully this subsistence sale is going to make it a little easier for folks to get out into the country,” said Henderson.