Jeff Lenard:
Welcome Convenience Matters. My name is Jeff Lenard with NACS. And today we’re just going to talk about gas prices. What’s going on, what it means to you, whether you’re a consumer or a retailer and what the future may hold as the promo goes in Convenience Matters. And to do that, we probably have the most renowned expert in the industry, Tom Kloza, who is Global Head of Energy Analysis – right there, that’s a mouthful – for the Oil Price Information Service, otherwise known as OPIS, So welcome Tom.

Tom Kloza:
Thanks, Jeff. Thanks for giving the right accent on the syllables of OPIS – always appreciate that.

Jeff Lenard:
Well, we do our best. We do our homework. So let’s just start really broad, Tom. What is going on with gas prices?

Tom Kloza:
Well, I think you start with crude oil and you start with the most disciplined cartel plus Russia, and some other friends, that we’ve seen since the Arab Spring. So we have high crude prices. Let’s say somewhere in the $80 range or whatever – very volatile. And we also have relatively wide refining margins for gasoline, very high prices for ethanol, which is 10% of the blends, and a retail segment, which still hasn’t quite recovered, let’s say from COVID. You’ll hear a lot of people talk about demand is back to where it was before the pandemic, but not quite there yet. I’m not sure it will get there. So that’s it, but people, what we’re seeing is the return of the third rail of politics, which can be gas prices. Whoever’s President or whoever the local politicians are, they tend to get the blame. And right now that blame is going to the Biden Administration incorrectly, I believe, but it’s going there nonetheless.

Jeff Lenard:
Well, when you talk about oil prices, oil prices right now are $80 a barrel, and every dollar that they change is about 2.4 cents per gallon. So if they go up or down by $10, it’s about 24 cents per gallon, or probably at the pump. You had talked about OPEC Plus and the discipline that the cartel has. Traditionally OPEC was about a third of all oil produced. Now we’re looking at this informal cartel that’s about half of all oil produced and that’s a difference than you mentioned – it’s Arab Spring – but it’s almost hearkening back to the seventies now. And I guess we put on those wind buttons because inflation’s back as well. Is it much more similar to the seventies in terms of the OPEC power?

Tom Kloza:
I think it’s pretty dissimilar actually, because the difference now is OPEC has so much extra crude in its pockets, so to speak. They’re wearing kind of like those big sort of cargo shorts that you see. And there’s a lot of crude there. There’s also a lot of crude in North America’s pockets. And the discipline is extending into U.S. companies primarily because of Wall Street. We’ve had two boom and bust cycles. You know, the most recent of course was the one where we went down to a negative price for oil and the people that control the capital don’t want to necessarily exploit the oil right now. So it’s the…I hate to use the “Hackney Perfect Storm” but it’s everything essentially conspiring to sort of send prices higher for world crude. And we’re also seeing the biggest rebound in gasoline demand worldwide that we’ve ever seen because we’re so low. During COVID we actually got down to gasoline volumes in the U.S. Were as low as they were during the Kennedy Administration. So that’s pretty compelling stuff.

Jeff Lenard:
Well, you had alluded to low gas prices. Now just looking at this century, I just was looking at some of the data from various sources and it struck me that when gas prices are really low, it’s usually because something really bad happened. And while it is painful for consumers to be facing gas prices pushing $5 in California, we certainly don’t want them really low because it usually means something bad happened. Isn’t isn’t that usually the case?

Tom Kloza:
That is true. And you know, it’s also behind probably some of the most brisk GDP numbers coming out of COVID and coming out of 2020, but people don’t tend to look at it that way and say, “oh, that’s okay, because this is what I spend each month and I’m better off now and I’m making more money or whatever.” You know, one of the things they need to recognize is a lot of people in the chain of command from the crude oil down to the people that…well, I’m going to say pump your gas because of my New Jersey roots…but let’s say that work at the stores, they’re all making more money than they were a few years ago. So there’s some really solid, decent elements to it as well. But will be gripped by both sides in centrifugal politics as something to blame the other side.

Jeff Lenard:
And in California, it’s certainly…California’s literally an island. Yes, it has higher taxes, but what else is going on in California that is pushing prices so much higher than they are the rest of the country,

Tom Kloza:
California made it pretty clear – the regulators there – a few years ago that they wanted to get rid of fossil fuels as quickly as possible. Now people may be seduced into thinking that can happen in a few years when it’s going to take half decades and decades. But one of the consequences of that is we’ve seen stranded assets. We’ve seen refineries close well ahead of sort of their natural life or what would be their natural death. And that’s particularly true in Northern California. You also have charges for carbon in that state. And it’s one of the reasons why California has kind of become unmoored from the rest of the country. You know, I like to describe gasoline prices looking at them as like being a weatherman. I remember in Earth and Space science, I was told that weather is the uneven heating of the earth. And petroleum weather is really uneven right now, particularly in this country, but California has become unmoored from the rest of the country because of refinery closures and additional elements that are added to the price of gasoline. We can criticize that and go crazy and rail at Nancy Pelosi but you can also say quite accurately that the air quality there is an awful lot better than when I used to go there in the 1980s and 90s.

Jeff Lenard:
So gas is increasing at a time when it usually decreases. Demand…part of that could be related to demand, but it’s really more related to oil prices and how they’ve continued to ramp up and refining margins being fairly robust. Now we are at the week of Thanksgiving and that is traditionally a busy period. I’ve seen mixed messages. I’ve seen some reports say that demand will be very much up compared to last year, which was the COVID holiday, but I’ve seen other reports saying that it’s going to be down because gas prices are too high. Is this something that OPIS looks at and do you have a crystal ball for what demand will be like, I guess you partner – well not I guess – you partner with AAA. So we can probably talk about their numbers.

Tom Kloza:
We do think that gasoline demand this Thanksgiving holiday, it’ll be much more brisk than last year. But still we don’t think it will be up to 2019 levels. I mean, if there’s 53 weeks this year, and I think there are for some odd reason, probably all of them are below 2019. So it’s going to be difficult to get there because so many people are working from home, but it is going to be a better demand than last year. The problem comes after Thanksgiving and into December and January when it gets cold. And of course the price of crude has been pumped up because of these worries that we’re going to get another polar vortex, like 2014, but and that’s goes back to what you say when bad things happen. You know, when it’s 10 below zero or there’s snow all over the ground or whatever, that’s when the prices tend to go down. So it would be very unusual if in the next hundred days we don’t see prices drop or ease a little bit. Right now it’s been lingering for longer, essentially in the last couple of months or so, and there’s a lot of reasons for that, but most of those should go away in the real dead of winter months.

Jeff Lenard:
So as retailers – and convenience stores sell about 80% of the gas in the country – look at some of the issues related to fueling. What might they want to look at short-term and long-term? I know the number one thing is, “well, you guys are making too much money,” and we just put out a blog that breaks down the costs and shows that if somebody is going to be blamed for gouging, it sure ain’t the retailer if you look at national averages. But what are the things that retailers might look at in terms of how it affects their operations?

Tom Kloza:
Well, I think you’re looking at a relatively calm winter, a lot more rhetoric about high prices and a lot of banks predicting incredibly high prices, but I think the real problem comes in the spring. I think we have lost 750,000 barrels a day of U.S. refining capacity to storms and to closures just in the last five months or so. We may lose some others again, if somebody has an asset and there’s a refinery that is going to close somewhere down the line, it may close a little bit too early. And so there’s a window there where I really worry about, which is spring 2022 in the second quarter where gasoline prices could go ballistic. I coined the term ‘Petronoia’ many, many years ago for what tends to happen every spring. It was stolen by George Clooney for that incomprehensible movie Syriana.

Tom Kloza:
And I think we’re going to see petronoia this spring and maybe this time wolf really be at the door. So retailers need to prepare for the volatility. They, really do. You know, they may pay something that’s measured in quarters and half-dollar pieces in differences between any time now and the next four months. And you look at what they’ve been dealing with, even in a calm October, November, there were some days where if a transport truck passed you on the road and it was all on gasoline and say about 8,500 gallons or so, the value of that product changed by over a thousand dollars in the space of the working hours of the day. And we liked that at OPIS, we like volatility, but it can really, really wreak havoc within an industry, which even if they’re making a little bit more on fuel than they have in the past, the reality is that there’s a lot of days where 30, 40, 50% of your margin is at risk in a 24-hour period. So I it’s a lot easier to write about the business than it would be to run any element of the business. I have however, been able to handle pumping my own gas in Florida. That was a real challenge after living in New Jersey for so long.

Jeff Lenard:
And of course, New Jersey and Oregon being the two states that still have fairly significant standards that somebody else has to pump your gas.

Tom Kloza:
In New Jersey, I sometimes I do think that people there, the residents, really are incapable of pumping their own gas. I might say that about Staten Island too. it just seems to be just a little bit too much of a challenge.

Jeff Lenard:
And, where does the hate mail, specifically the Pete Davidson-related hate mail go to? Where do you suggest those letters go to?

Tom Kloza:
I would send it to Pete Davidson. I mean, something about his life is very charmed despite coming from Staten Island. So,

Jeff Lenard:
So going back to what you had said earlier about petronoia and set aside your, your beef with, with George Clooney, we know in the spring, traditionally, when you look at all the things that go on in the spring run up, they go up at 50 cents a gallon. The average year is about 50 cents a gallon, some years less. I think 2008 was the highest, where it went up about $1.10 from low threes to $4.11 a gallon for the peak. And right now we’re sitting at a fairly high number for this time of the year and you’re saying there could be volatility out there. That that’s pretty scary when you look at how that might affect…because we know when prices go up, when wholesale prices go up, margins tend to constrict and high prices tend to mean that people spend more money on gas, less money inside the store. So that could be an ugly storm, a-brewing for our industry.

Tom Kloza:
It could be, but it tends to be brief. The petranoia, it tends to be kind of like a panic attack with paranoia, I suppose. And it should run its course. Now the problem is sometimes when you have this runaway inflation and I’m kind of saying that this particular run-up in crude oil and gasoline might be transitory, but we’re going to get an episode in the spring that could be really dramatic. You can have some damage to the economy and you can have people spending a lot less money on a lot of things. And the one trend that I’ve noted in previous years is there’s a lot more cocooning that happens after the Christmas holidays. People just tend to sort of settle in and not move about as much. And not like a COVID knock-down, but certainly January tends to be the depressive phase of the manic depressive or bipolar markets that we’ve become used to. So that’s where I see it going. I don’t believe what the investment banks say that we’re in the middle of a Supercycle where we’re going to see a hundred and $150 or even $200 oil. I kind of believe in Superfreak, Super Bad and Superman, but not the Supercycle.

Jeff Lenard:
I temporarily have no words. That was well done. I also noticed that when you see somebody predict that prices will…there was one time about a decade ago, somebody was predicting that oil prices, we hit it $150, maybe $200 a barrel. And then the next paragraph said so-and-so who has a book coming out next month, that was the first trigger. And then the second one was “if the house of sod collapse”s and it’s like, oh, that doesn’t feel quite as genuine as I thought it would.

Tom Kloza:
I know the author…I knew the author, he passed away, unfortunately he had a stroke in a hot tub. So that’s one thing you got to always keep in mind. But also had a book, I think it was called “Midnight in the Desert” or something along those lines. And that’s the problem with a lot of the analysis you get out there. I’m not gonna toot my own horn, but unlike Gandhi, I don’t even buy oil stocks, let alone play oil futures, I did that very briefly back when oil futures debut, but most of the people who were predicting prices – you know Boone Pickens was famous for this – they have huge positions. And when you integrate hope within your prognosis or your prophecy it’s like, I hope that Padma Lakshmi, she comes and cooks meals for me from Top Chef all the time, but it’s probably not realistic to think that’ll happen.

Jeff Lenard:
I hope this is not a strategy, but hope is still as another movie says, “so you may not have a chance.”

Tom Kloza:
“Hope is the thing with feathers” as Woody Allen said in a great, great book called “Without Feathers” about 50 years old.

Jeff Lenard:
So, kind of wrapping this up, we started out by talking about what’s up with gas prices and looking at going into the Thanksgiving rush ,if you will. And we looks like it will be up this year, but not as much as last year in terms of demand and people on the road. So I know last year, I think a lot of people were saying it would be nice to be in a traffic jam for a change because coming into COVID was just a tough year. Unfortunately it looks like we’ll have traffic jams and high prices but anything that you think we also ought to pay attention to as consumers or as retailers as we look to the next couple months with gas prices? Or I’ll throw out one more question, anything retailers want to do to maybe tell customers, “hey we’re with you – we’re on your side.”

Tom Kloza:
Well the greatest myth out there is that rising prices are great for retailers and declining prices are awful form. And we know that the opposite is true. So that’s always a good message to get out there. And you know, that years ago in the NACS surveys, everybody thought that a typical retailer when the price was $1.59 or $2 made 50 cents a gallon. So I think most people have been pretty well-schooled on that. But it’s kind of a slice of Americana. I mean, there’s guns and there’s gasoline and it inspires real vitriol in a lot of people. So it’s a tough message to get out there. I would say one message is that at the moment, there’s nobody to blame. If you want to blame anything, you can blame the recovery from COVID, which has created a demand spurt that we’ve never seen before.

Tom Kloza:
And you can blame this newfound discipline from OPEC Plus, which is probably going to fall apart at some point. I mean, there’s one thing about $80 barrel oil or $70 barrel oil is the folks on Wall Street. You know, the private equity companies will say, ‘hey we want to bring it all up, but we want to bring it up now when the prices are this.’ So I think we’re going to see these wild swings and this wild weather in crude oil and gasoline continue. We just need to be…what’s a Kipling quote about if you can keep your head about you and everyone around you is losing theirs…it seems like the latter part of that has been true for a lot of people, but not that the first part of the premise.

Jeff Lenard:
Yeah, you referenced a consumer’s thinking how much retailers make per gallon. I went back and looked at a consumer survey that we had 2018. The last time we asked this question, we said, ‘okay, when you fill-up a traditional fill-up…$30 for a fill up, what do you think retailers making per gallon?’ The answer was $2 and that’s not margin, that is profit. They were thinking that retailers make $2 on essentially a $3 gallon of gas. And I referenced the movie “Better Off Dead” and I said “I want my $2.” That’s a nice profit, but that’s nowhere near what it is at the retail level.

Tom Kloza:
So many myths. I mean, very quick story. You know, long ago, Andy Rooney called me up, left a voicemail on my phone and he was doing a story on gasoline. He would drive across the George Washington Bridge to save money on gasoline in New Jersey. And he had a vehicle that he thought needed mid-grade, he’d actually put in the credit card and get X amount of unleaded regular and then get X amount of premium and blended it himself because he did the linear math, not realizing that that was creating two credit card charges for the retailer in Fort Lee or whatever. So it’s a tough message to get across.

Jeff Lenard:
And wasn’t there like a toll associated with that? I think the GW is now $20, isn’t it?

Tom Kloza:
It used to…I always think when people come into New York and they go to the GW or they go to the Verazzano now they must think it’s a joke when it’s like $24, I believe for one of them. They have to think it’s a joke that it’s part of like a National Lampoon movie or something, but it’s not. To get into the city, not to get out. So it didn’t make much sense, but it’s like making that left turn to save 2 cents somewhere and then spending $7 on your cafe latte.

Jeff Lenard:
Well, that’s the thing we look at and we do consumer surveys on that as well. And you’re right. I’ve heard retailers say they’ll step over a quarter and then they’ll drive down the street to save a penny.

Tom Kloza:
And I’m glad that people are basically so crazy about the price of gasoline and the behavior associated with it because imagine if I was writing about laundromats and lint for all of these years, it wouldn’t be anywhere nearly as dynamic. So it’s, it gets more dynamic and interesting every year.

Jeff Lenard:
Well, I’m sure you’d find a way to make lint interesting. And maybe we talk about lint next time. But hope to have you back soon. And I know we covered a really broad swath today. Maybe next time we talk, we can dive into refining or production or something like that and just explore where things are going, or maybe even look at the Colonial [Pipeline]. We’ve had a lot of interesting things related to fuels this year. While this is a podcast and you can’t see Tom, I do want to reference Warren Zevon song, “Werewolves of London,” his hair was perfect.

Tom Kloza:
I miss Warren’s Zevon, I really do. I’m an excitable boy and hopefully not like “Roland the [Headless] Thompson Gunner.”

Jeff Lenard:
Well, we covered a lot there. Tom, Anybody that wants to know a little bit more about OPIS and some of the data that, that you produce and it’s not just the data, it’s the analysis behind the data. Where can a layman or somebody that wants more detail learn more about OPIS?

Tom Kloza:
You go to the OPIS website, which is OPISnet.com and it’ll take you to all sorts of different places. And I don’t think you’ll be besieged with ads or spam or Canadian pharmacy solicitations, but can’t vouch for that.

Jeff Lenard:
Well, Tom, thank you for joining us today and hope to have you again soon. Thanks for joining us. Thanks for listening to Convenience Matters.

Convenience Matters Outro:
Convenience Matters is brought to you by NACS and produced in partnership with Human Factor. For more information, visit convenience.org.

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