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NACS 2006 Gas Price Kit

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NACS 2006 Gas Price Kit Powered By Docstoc
					Gasoline Prices 2006: Oh No, Not You Again

 NACS Online Annual Gasoline Price Resource Kit


                 February 2, 2006

           www.nacsonline.com/gaskit2006
Gasoline Prices 2006: Oh No, Not You Again
The basic conditions that influenced the petroleum markets in 2005 are largely unchanged. And that is of
concern to consumers and retailers alike as the petroleum industry prepares for the beginning of the spring
transition to summer-blend fuel.

Overview
How to Use These Resources
Information about why these resources were developed and how they can be used.

Backgrounders
Who Sells Gasoline in the United States?
Convenience stores sell most of the gasoline in the United States, and only a few percent are owned by the
oil companies.

How Do Retailers Get – and Sell – Gasoline?
Retail prices directly track wholesale gasoline prices. And how and when you purchase wholesale gasoline
plays a significant role in the ultimate price at the pump.

Factors That Could Affect the Petroleum Markets in 2006
Crude oil and gasoline prices again hit record highs in 2005. Could we see more of the same in 2006?

Retailers’ Pain at the Pump
Convenience stores, which sell an estimated three-quarters of the country’s fuel, dislike higher prices as
much as their customers do, as margins decrease while costs – particularly credit card fees – increase.

Retailer’s Margins Shrink as Prices Climb
As gasoline prices increased 43 cents for the year in 2005, retailers’ margins declined.

Diesel Fuel: A New Day Dawning
Diesel fuel prices traditionally are less than those for gasoline, but the opposite has been the case for over a
year – and there are additional concerns looming.

The U.S. Petroleum Industry: Statistics, Definitions
The latest statistics and information available on demand and supply, refining, distribution, taxes and retail.

100 Years of Gasoline Retailing
Here are some of the significant events and dates impacting the motor fuels industry since the first gas
station opened in 1905.

The Effect of Hurricanes Katrina and Rita
You didn’t have to be one of the thousands of convenience stores directly in the paths of Hurricanes Katrina
and Rita to be affected.

    •   “Small Industry, Big Hearts” (from January 2006 NACS Magazine) (PDF)
        Chip Lavigne, a one-store operator in Mandeville, LA, experienced the best of what the industry has
        to offer after Hurricane Katrina.
    •   NACS Testimony: Hurricane Katrina’s Effect on Gasoline Supply and Prices
        Bill Douglass, CEO of Douglass Distributing Co., represented NACS and the Society of Independent
        Gasoline Marketers in September 2005 testimony before the U.S. House Energy and Commerce
        Committee.
        (http://www.nacsonline.com/NR/rdonlyres/epgyap46eundwbjzrfuwlbwnochp2umjanb3c4up2zn4tmhu
        kznnxppw3xlgfl53l3hcmgivucl46b5d4552tdeun2b/Testimony_Douglass.pdf)
    •   Hurricane Katrina: The Impact on the Retail Gasoline Market
        NACS developed a resource kit in early September 2005 looking at how Hurricane Katrina affected
        the retail gasoline market.
        (http://www.nacsonline.com/NACS/Resource/PRToolkit/Campaigns/Cover_HurricaneKatrina_Gasoline.htm)
    •   Hurricane Rita Also Impacted Markets
        Somewhat lost in a review of 2005 was the continuing effect of Hurricane Rita on the petroleum
        industry.

Graphics
Where Does Your Fill-Up Go? (PDF)
More than 90 percent of the cost of a gallon of gasoline is determined before it even leaves the refinery.

From Dollars in Cost to Cents in Profit (PDF)
After expenses, retailers may only see a penny or two in pretax profit per gallon.

U.S. Gasoline Supply Movements (PDF)
What happens to petroleum supply in one area of the country affects other areas, since gasoline is often
produced in one region and shipped to others.

A Complex Transportation System (PDF)
Crude oil and refined product most often travel via one of the country’s many pipelines.

Boutique Fuel Requirements Across the U.S. (PDF)
This color map shows some of the major fuel requirements across the U.S., as of January 2006.

Related NACS Fact Sheets:
Gasoline Theft at Convenience Stores
When gasoline prices increase, many gasoline retailers report an increase in gasoline theft, commonly
referred to as "drive-offs."
(http://www.nacsonline.com/NACS/Resource/PRToolkit/FactSheets/prtk_fact_gastheft.htm)

Motor Fuels Sales at Convenience Stores
Convenience stores sell an estimated three quarters of all gasoline purchased in the country.
(http://www.nacsonline.com/NACS/Resource/PRToolkit/FactSheets/prtk_fact_motorfuels.htm)

Debit Holds for Fuel Purchases
As gas prices and the use of plastic at the pump have increased, consumers are increasingly concerned
about the debit “holds” on their accounts.
(http://www.nacsonline.com/NACS/Resource/PRToolkit/FactSheets/prtk_debitholds_factsheet.htm)

Credit Card Processing Fees a Growing Challenge
Fees now equal approximately 85 percent of a store's profits – and continue to grow.
(http://www.nacsonline.com/NACS/Resource/PRToolkit/FactSheets/CreditCardFactSheet.htm )

Hypermarkets Entering Petroleum Marketing
While convenience stores still sell an estimated three-quarters of the gasoline in the U.S., new retail
channels are selling gasoline.
(http://www.nacsonline.com/NACS/Resource/PRToolkit/FactSheets/prtk_fact_hypermarket.htm)
Gasoline Myths... and Facts
A few of the more common myths – and the actual facts – about gasoline.
(http://www.nacsonline.com/NACS/Resource/PRToolkit/FactSheets/prtk_fact_gasmyths.htm)

Other Resources:
Online Resources on Gasoline Prices
Web sites and resources of interest.

Contact Information for Reporters/Feedback
Reporters can click here to access NACS media contacts. Also, retailers are encouraged to provide
feedback to help NACS address the issues of most concern to you.
How to Use These Resources
To address consumers' questions about gasoline prices, the National Association of Convenience Stores
(NACS) has annually developed an online resource kit providing analysis and information about the U.S.
petroleum industry.

As the national trade association representing the convenience and petroleum retailing industry, which
sells an estimated three-quarters of all the gasoline purchased in the United States, NACS developed
these resources so that the media, legislators and the general public can better understand the petroleum
marketing industry, especially at the retail level. These resources also can be used by retailers who are
interested in conducting their own outreach in communicating the issues behind today's higher gasoline
prices.

This year we have made it even easier to use or share the information in the kit. With one click, you can
download all of the kit’s contents to your computer. Or you can just print individual PDFs covering topics
of most interest.

Convenience store retailers dislike higher gasoline prices as much as their customers do, since margins
decrease while costs — particularly credit card fees — increase. When wholesale prices go up, prices at
the pump typically lag as retailers absorb some of the wholesale price increases by reducing their
margins to remain competitive. Price volatility in 2004, for example, helped lead to gasoline margins that
were at their lowest levels since 1984. (Final NACS data for 2005 is not available yet, but data from the
U.S. Energy Information Administration suggests that margins were even slimmer in 2005.)

These convenience stores also do not benefit from the strong upstream profits announced by the major
oil companies. Very few retail fuel outlets are owned by the major oil companies. In fact, less than 3
percent of all convenience stores selling gasoline are owned by one of the five major integrated oil
companies. To counter slim profit margins for gasoline sales, these stores seek to drive profits by growing
their in-store sales.

This is the fifth year that NACS has developed an online resource kit addressing gasoline issues. While
the circumstances may be different every year, the pattern seen in petroleum markets is eerily similar
year to year, and will once again be of concern for consumers and retailers alike in the coming months.
The first week of February traditionally marks the beginning of the spring transition to summer-blend fuels
for the petroleum industry. Since 2000, gasoline prices have increased, on average, more than 30 cents
between the first week in February and the time of the seasonal high price, typically late May. However,
some of the factors that affect seasonal transition also affect gasoline prices throughout the year.

In a sense, the petroleum markets are similar to the Bill Murray movie Groundhog Day in which his
character wakes up every day to find that it unfolds, event-by-event, exactly the same as the day he had
just experienced. Like the character in Groundhog Day, the petroleum markets experience similar
conditions over and over — except on an annual, rather than daily, basis.

However, 2006 is different in several respects. First, at a time when retail prices typically reach their
lowest level of the year, retail gasoline prices are at all-time seasonal highs. Second, the effects of
Hurricanes Katrina and Rita are still being felt. Several refineries are still offline as a result of storm
damage. Others postponed until early 2006 previously scheduled maintenance, which further reduces
capacity in the coming months.
It is because of the similarity to the movie Groundhog Day and the traditional start of the spring transition
to summer-blend gasoline that NACS has annually launched its online resource kit on February 2,
Groundhog Day.

We have tried to incorporate the most current data on the petroleum marketing industry, and some
numbers are just days or weeks old. For NACS-specific data, we have used 2004 numbers, since NACS'
2005 industry data will not be available until April 2006.

These resources are designed to provide resources for an open discussion about the issues impacting
supply — and prices — during the seasonal transitions and, through a better understanding of the
petroleum markets, help ease the frustrations consumers often experience when prices increase. And,
importantly, to help guide discussions on the issue of higher gasoline prices to solutions that can benefit
us all.
Who Sells Gasoline in the United States?
Convenience stores sell the majority of the gasoline purchased in the United States, and despite
canopies that promote a specific brand of gasoline, very few of these stores – less than 3 percent – are
owned an operated by one of the integrated, major oil companies.

It is much more likely that the business is owned by an independent entrepreneur who lives in the
community. Of the 110,895 convenience stores selling gasoline in the United States in 2004, a whopping
55 percent (61,148 stores) were one-store operations, compared to only 13 percent (14,612 stores) that
were operated by a company having 500 or more stores.

Convenience stores sell more than three-quarters of the country’s gasoline
Convenience stores in 2004 sold an estimated 79 percent of all gasoline purchased in the U.S. – a sharp
increase from as recent as 1997 when convenience stores sold an estimated 59 percent of the country’s
gasoline.

Overall, 80.2 percent of convenience stores sell gasoline, and motor fuels (gasoline and diesel fuel) sales
account for 66.5 percent of the convenience store industry’s total sales. (However, low gross margins on
fuel – 6.9 percent in 2004 – mean that motor fuels sales contributed only about one-third of total store
gross margins dollars – 36.6 percent.)

Contrast this to 1971, when only 6.8 percent of convenience stores – a total of only 1,401 stores
nationwide – sold gasoline. What happened?

Following the 1973 OPEC oil embargo, more states began allowing self-service gasoline (New Jersey
and Oregon still prohibit it), so the number of convenience store gasoline outlets grew. By 1976, stores
selling gasoline were profitable and the numbers were growing. There was a competitive battle in
gasoline retailing as seen by the number of stores offering gasoline – the average margin dropped, while
the average gallons sold per store went up. As the major oil companies withdrew from certain locations,
convenience stores became more and more significant as a source of gasoline sales.

“Hypermarkets” increasingly are selling gasoline
Besides convenience stores, a growing percentage of gasoline sales in the U.S. are from “hypermarkets”
– the term collectively refers to the group of mass retailers that includes supermarkets, discount retailers
and warehouse clubs. According to Energy Analysts International (EAI), as of July 2005, 3,860
hypermarket store sites sold motor fuels, but that figure continues to grow. Hypermarkets
comprise approximately 2-3 percent of the motor fuels retailing outlets, but capture 7.7 percent of total
fuels sales. Wal-Mart has approximately 1,300 gasoline retailing sites inclusive of Wal-Mart sites (Optima,
Murphy and Mirastar), Neighborhood Stores and Sam’s Clubs, EAI estimates.

One particular area of growth for fuels sales are supermarkets. In 2003, only 18 percent of new
supermarkets had gas pumps. But almost 62 percent of grocery stores that were scheduled to be
constructed in 2004 included fueling in their blueprints, according to the Food Marketing Institute.

Fuel-only stations on the decline
The rest of the gasoline purchased in the United States is sold at traditional service stations, but those
that depend on gasoline sales alone are disappearing due to low and declining gasoline margins. An
annual survey by the trade publication NPN, which tracks all retail outlets where the public can purchase
gasoline (including very-low volume outlets such as marinas) bears that out. In 1995, NPN counted
195,455 fueling outlets. In 2005, that number dropped to 168,987 outlets.

Most stores are ‘branded,’ but few are operated by major oil
NPN also looks at the branded retail outlets by company. These were the top branded outlets in 2004:
   • Shell Oil Products U.S. (15,821 sites)
   • BP America Inc. (14,200 sites)
   • Citgo Petroleum Corp. (13,694 sites)
   • ConocoPhillips (13,300 sites)
   • ExxonMobil (12,119 sites)

Also of note were Chevron Products (9,023 sites), Sunoco (4,700 sites) and Getty (2,055 sites.)

These figures include all gasoline retailers, not just convenience stores; cumulatively they represent more
than half of the country’s fueling outlets.

One of the biggest areas of confusion today relates to branded gas stations and oil profits. Most
consumers assume that the strong profits announced by the major oil companies, which are derived from
exploration and production and refining operations, are also enjoyed by the station selling a specific brand
of gasoline. Nothing could be further from the truth.

While most of the 110,895 convenience stores selling gasoline sell a branded gasoline, very few are
owned and operated by the major oil companies. According to TDLinx, an ACNielsen brand that develops
an industry store count endorsed by NACS, as of August 2005 only 2,886 convenience stores selling
gasoline were owned and operated by one of the five major integrated oil companies – or 2.6 percent.

Here is the breakdown:
   • BP North America: 1,243 stores
   • Exxon Mobil Corp.: 882 stores
   • ChevronTexaco Corp: 363 stores
   • Shell Oil Products US: 243
   • ConocoPhillips Inc.: 155 stores

The confusion largely comes from the fact that the majority of neighborhood gas stations typically get
marketing support from an oil company in exchange for carrying that brand of gasoline. This includes
exterior signage, such as canopies, that lead some to believe that the store is owned by the oil company
producing that specific gasoline brand. However, the reality is that there is no link beyond an agreement
to sell a specific gasoline. The arrangement is similar to arrangements inside the store, where a store
may choose to dispense a specific brand of soft drink and receive branded dispensers and other signage.
But the business arrangement ends there.
How Do Retailers Get – and Sell – Gasoline?
Retail gasoline prices directly reflect wholesale prices. However, how – and when – retailers purchase
wholesale gasoline can differ significantly, leading to varying prices and/or margins on the gasoline they sell.

The wholesale market has complexities that lead to retailers having different cost structures, whether they
are branded or unbranded, have long-term contracts or buy on the spot market or, in the case of tight supply
periods and rising wholesale prices, even the time of day that wholesale product was purchased can play a
role in determining the retail price.

Retail Gasoline Supply
Retailers obtain gasoline supplies based upon the nature of their relationship with their suppliers, and
because there are several different ways that retailers can purchase gasoline, the cost structure and
availability of gasoline may vary greatly from one retailer to another, even those operating under the same
gasoline brand. There are three primary supply arrangements influencing a retailer’s operations:

    •   Major oil owned and operated – It’s estimated that less than 5 percent of the approximately
        168,000 retail gasoline facilities in the United States are owned and operated by the major oil
        companies. (Less than 3 percent of the approximately 111,000 U.S. convenience stores selling
        gasoline are owned and operated by major oil companies.) These retail locations receive product
        directly from the corporation’s refinery assets and their profit or loss is integrated into that of the
        corporation.
    •   Branded independent retailer – Approximately 55 percent of retail gasoline facilities are operated
        by independent business owners who sign a supply contract and sell gasoline under a brand owned
        or controlled by a refining company. Not every contract is drafted equally, and various market
        conditions can influence the terms of the contract. Branded retailers pay a slight surcharge per gallon
        for using the refiner’s brand, benefiting from the supplier’s marketing and ensuring a more secure
        supply of product. Their wholesale costs are established by their refiner supplier. When supplies are
        constrained, these retailers are given a higher level of priority for accessing product, although access
        to supplies may be restricted.
    •   Unbranded independent retailer – Approximately 40 percent of retail gasoline facilities are
        operated by independent business owners who do not sell a gasoline under a brand owned or
        controlled by a refining company. These retailers purchase gasoline off the unbranded wholesale
        market, which is comprised of gallons not dedicated to fulfill a refiner’s contracts. These retailers do
        not pay a marketing surcharge like their branded competitors do; consequently, unbranded gasoline
        is typically sold at all levels of trade for a lower price than branded gasoline. However, when supplies
        are constrained, these retailers have the lowest level of priority to access gasoline, often incur the
        largest wholesale price increases and may be completely denied access to product. Their wholesale
        costs are also established by the refiner supplier(s).

A company’s supply contacts and size determine its options for obtaining gasoline. Branded independent
retailers have one option for gasoline – the refiner that provides it with supply. Some larger unbranded
independent retailers also may have contracts with a specific refiner, or even multiple refiners. Others may
simply purchase product off the open market.

Most retailers are small businesses that obtain their gasoline at a terminal, also known as “the rack.” Prices
at the terminal are known as “spot” prices, and these typically experience the most price volatility.
For those purchasing fuel at the rack, there are two options for delivery. Some companies may elect to have
gasoline delivered to their stores by a “jobber” who delivers fuel to their store – branded or unbranded – for a
delivery fee. Other retailers have invested in their own fleets of trucks that go to a specific terminal – or
terminals – to obtain gasoline. These companies may also serve as jobbers to other retailers.

Some larger unbranded retailers may purchase gasoline futures, attempting to lock in specific prices for
delivery on a specific date in the future. This type of purchase, commonly referred to as “hedging,” helps
these retailers manage their costs in anticipation of volatile wholesale prices.

Retail gasoline pricing considerations
Wholesale gasoline is a commodity that is traded on the open market. As such, its price can change by the
minute, which may influence the cost structure for a retailer.

In 2004, convenience stores sold, on average, about 3,500 gallons of gasoline per store per day. The
average underground storage tank has a capacity of 8,000 or 10,000 gallons, so many retailers average a
shipment of gasoline once every day or so. However, high-volume retailers – those selling three or even four
times that amount – may receive multiple shipments each day. The cost of each delivery can vary
significantly, especially when wholesale prices are in flux.

Competitive Considerations
While wholesale costs are a significant factor in retailer prices, the retail pricing decision also is heavily
influenced by market conditions and local competition. Ultimately, movements in wholesale gasoline prices
influence the cost structure of a retail facility, but competition for customers will dictate the store’s profitability.

How a retailer reacts to wholesale market conditions is based upon its individual pricing strategy, which
varies greatly from retailer to retailer.

For example, a retailer may seek to maintain consistent margins, matching its retail price with variations in
the wholesale cost based upon a certain formula. This strategy may result in a retailer pricing gasoline
contrary to the prevailing competitive market conditions. Consequently, when wholesale prices increase, the
retailer may, in fact, become one of the more expensive stores in the market in order to maintain a consistent
margin. The result could be reduced customer counts and diminished overall revenues. However, when
wholesale prices decrease, the retailer may in turn become one of the least expensive stores in the market,
thereby recovering customer counts and overall revenues. Margins for this retailer would remain consistent
over time.

Conversely, a retailer may seek to remain competitive in the market place, in spite of changing wholesale
market conditions. This strategy may enable the retailer to maintain customer counts and overall revenue by
setting competitive prices; however, it could lead to reduced or even negative margins. Competitive retail
prices may not increase as quickly as wholesale prices, resulting in lost margins for the retailer. This strategy
anticipates that during a declining wholesale market, local competitive conditions may enable the retailer to
recover lost margins by slowly reflecting wholesale price changes at the pump. This type of retailer is
focused on the complete market cycle, trusting that market forces will result in an average positive margin on
gasoline sales over time.

With either strategy, gross margins are likely similar over the course of a year. In 2004, a gasoline retailer’s
average gross margin (before expenses) was 12.7 cents per gallon; after expenses, typical net profits per
gallon are a few cents per gallon, at most.

Replacement Costs
In a rapidly raising market, a gasoline retailer faces the significant challenge of maintaining sufficient
operating capital to cover the cost of the product that will replace the inventory it is selling.

A gasoline retailer typically seeks to establish a retail price based on the cost of replacing the gasoline
currently at the retail location, not the cost of that product itself. Basing prices on “replacement costs” is
especially critical when wholesale prices fluctuate frequently. A retailer must generate sufficient cash from its
current retail sales to purchase its next delivery of gasoline; otherwise, the retailer would be constantly using
debt to finance wholesale gasoline purchases. When wholesale gasoline prices hit $2.50 per gallon, a fill-up
of even 6,000 gallons of gasoline can cost a retailer $15,000.

With pricing influenced by replacement costs, there can be consumer misperceptions when prices rise, as
some consumers observe prices changing at a retail location even though the station did not receive a new
shipment of gasoline. However, the store may be responding to a notice from its supplier about how much its
next shipment will cost. When prices retreat, market competition takes over. Each retailer makes its own
pricing decisions based upon its calculations of the best volume/margin equation to maximize its profits.
During these periods, consumer interest in prices wanes and they usually don’t notice that prices dropped
even though a new shipment has not arrived.

Also, even if a store receives multiple shipments in one day, each priced differently, some states, such as
New Jersey, limit retailers to one price change per day.

Retailer Costs
In addition to wholesale prices and competitive pressures, gasoline retailers must consider the following
costs and expenses:

    •   Federal, state, and local excise and sales taxes, which average approximately 46 cents per gallon in
        the United States. (The federal gasoline tax is 18.4 cents per gallon and each state has additional
        gasoline taxes.)
    •   Transportation fees (1 to 3 cents per gallon, depending on distance).
    •   Credit card transaction fees (up to 3 percent of the price of each transaction).
    •   Retailer overhead (employee wages, rent, electricity, depreciation and other costs of doing
        business).
    •   Retailer net profit (varies from day to day and market to market – retailer net profits can range from
        negative numbers to several cents per gallon). NACS estimates that the average retailer had a net
        pretax profit of between one and two cents in 2005.

There is a difference between gross retail margins (the difference between the tax-paid wholesale cost of
gasoline and the retail price of gasoline at the dispenser) and net retail margins (the gross retailer margin
minus the costs of doing business outlined above). For example, a gross retail margin of 10 cents per gallon
may well result in a zero net retail margin once all retailer costs are taken into account.

Wholesale Gasoline Pricing
Wholesale gasoline prices generally are tied to one of two data points:

    •   A price based on a differential from the current price of a future gasoline delivery contract from a
        commodities exchange (New York Mercantile Exchange, known as "the Merc" or "Nymex") or from a
        gasoline price tracking service, such as Platts, Oil Price Information Service, or DTN; or,
    •   A price based on the "cash" or "spot" market for gasoline.

Nymex- or Platts-based wholesale pricing is used primarily for short-, medium- and long-term contracts for
gasoline supplies between refiners, blenders, importers and traders and gasoline wholesalers and retailers.
Such a contract might call for a supplier to sell a certain quantity of gasoline at " Nymex plus 2 cents" or
"local OPIS low rack minus one cent."

Spot market-based wholesale pricing is used primarily by gasoline wholesalers and retailers for immediate
delivery of gasoline supplies by these parties. Such pricing might call for immediate delivery of 10,000
barrels of 87 octane unleaded at New York harbor for a set price.

Nymex and spot market gasoline prices move independently and are influenced by many factors, including
national and regional gasoline inventories, the price of crude oil, weather and market events such as pipeline
disruptions and refinery shutdowns.
When market conditions become more volatile because of weather or crude oil events, Nymex -based prices
may rise somewhat, while spot market prices may soar. A gasoline market in which spot market prices are
higher than NYMEX prices for future deliveries is termed a "backwardated market" and generally indicates
that the markets believe that current upward pressures on prices will ease in the future.

Many gasoline wholesalers and retailers use the Nymex to hedge their gasoline supply needs, thereby
reducing their exposure to future gasoline price movements. However, many trades of Nymex futures
contracts are undertaken by "paper traders" – brokers and speculators that never expect to take physical
delivery of a gallon of gasoline from a Nymex futures contract. These paper traders tend to lead Nymex
contract prices up or down based on market conditions and breaking news events.

Wholesale prices for gasoline generally are reported by most sources as excluding federal, state and local
taxes, without the transportation costs from the wholesale market to the retail outlet, and do not include any
retailer-related costs, including overhead, credit card fees, and any profit margin the retailer may seek. Thus,
a spot market price of $2.00 per gallon for 87 octane unleaded gasoline does not include any of the below
the "rack" costs and expenses that ultimately determine a retailer's "laid-in" costs of gasoline. These costs
vary by market and by other conditions, but generally add approximately 60 cents to the retail cost of
gasoline.
Factors That Could Affect the Petroleum Markets in 2006
At the beginning of 2005, retail gasoline prices were at an all-time high for the first week in January. And it
only got worse from there; the first week of January saw the low point for both crude oil prices ($44.07 per
barrel) and gasoline prices ($1.78 per gallon).

Compounding a tight international supply and demand situation in 2005 were Hurricanes Katrina and
Rita, which took out a significant percentage of the nation’s petroleum infrastructure. Crude oil prices
topped $70 per barrel on August 30 before settling that day at $69.91 and retail gasoline prices peaked at
a national average price of $3.069 the week ending September 5.

As 2006 began, prices were even higher than early 2005: crude oil traded for $59.62 and gasoline
retailed for $2.24. Although the industry was slowly recovering from the hurricanes, the basic conditions
that influenced the market at the beginning of 2005 remained largely unchanged. Consequently, gasoline
prices this year will once again be affected by seasonal and situational factors from around the country
and across the globe — as well as down the street.

Although the primary factor affecting retail gasoline prices is the price of crude oil, a number of other
factors also could affect supply and prices beginning in February, particularly refinery maintenance and
the transition to summer-blend fuels. While the specific circumstances may be different, the pattern seen
in the petroleum markets is eerily similar year to year. However, because there are so many factors that
influence gasoline supply — and, ultimately, prices — it is impossible to predict the level of volatility.

There are a number of events, conditions and factors that energy analysts will be watching again this
year, chief among them crude oil prices and the overall health of the refining industry, since these two
critical factors have exhibited considerable volatility in recent years and remain the driving forces behind
retail gasoline prices.

Here's a look at some of the factors that will affect what consumers pay at the pump in 2006:
   1. Elevated price of crude oil and continued strong international demand
   2. The impact of speculation on the markets
   3. Spring transition to summer-blend fuels
   4. Refining constraints and the pace of recovery from the hurricanes
   5. Continued effect of "boutique" fuels on supplies and product distribution
   6. Continued strong domestic demand for fuel
   7. Competition for the gasoline customer
   8. The wild card that can't be anticipated


1. The elevated price of crude oil and continued strong international demand will
have a significant impact on gasoline prices in 2006.
The cost of crude oil is the biggest factor affecting retail gasoline prices. In 2005, the cost of crude oil
comprised 52.5 percent the retail price of gasoline, according to the U.S. Energy Information
Administration (EIA).

Crude oil costs skyrocketed in 2005, averaging $56.62 per barrel in 2005, an increase of 82.7 percent
over the previous five-year average. And the price of crude oil is expected to remain high in 2006; EIA
projects that crude oil will average $63 per barrel in 2006. Preliminary data from EIA from the first three
quarters of 2005 indicate that international oil demand increased from 82.48 million barrels per day to
83.12 million barrels per day while supply increased from 83.04 to 84.18 million barrels per day, for a net
positive impact on the world oil balance of 500,000 barrels per day. However, EIA’s Short Term Energy
Outlook indicates that international demand will increase at a faster rate in the coming years due to the
United States’ recovery from events in 2005. Furthermore, EIA predicts that demand will increase in
developing Asian countries, excluding China, which itself is expected to continue to steadily add
approximately 500,000 barrels per day to demand.

EIA also predicts that international crude oil supplies will strengthen, provided the 2006 hurricane season
does not negatively affect U.S. production again. If crude oil prices average EIA’s forecast $63 per barrel,
retail gasoline prices will be affected.

2. Crude oil and gasoline are commodities and the impact of trading is felt at the
pump.
Crude oil and gasoline are more than fuels – they are also commodities and, as such, they are traded on
the commodities markets. And the financial markets can often react more to speculation than to reality. A
number of analysts have suggested that over the past few years crude oil prices include a “fear premium”
of upwards of $10-15 per barrel built into the price of crude oil based on fears of what might happen, as
opposed to what is happening, in the petroleum markets.

And as the stock market has softened in recent years, more traders have looked to the commodities
markets, specifically the petroleum markets, to capture big returns by buying or selling commodities at the
right time. Certainly, crude oil is increasingly being traded on the financial markets. A decade ago, just
under 100,000 futures contracts for light, sweet crude oil were sold in a typical day on the New York
Mercantile Exchange (Nymex). But on August 30, 2005, the day after Hurricane Katrina, more than
400,000 contracts traded hands. Daily volume for 2005 averaged well over 200,000 contracts.

Finally, more mutual funds are now including commodities in their portfolios. But Nymex, along with the
Chicago Mercantile Exchange, also has made it easier for smaller investors to get a piece of the action. In
2002, the exchanges introduced e-miNY, which allowed investors to purchases half-shares of the
standard 1,000-barrel contract. The new offer has proven to be enormously popular, increasing 10-fold in
daily volume between 2003 and 2005.

3. The transition from winter- to summer-specification gasoline has historically
prompted a price increase.
In the winter, gasoline is formulated with a higher evaporative tendency. This makes it easier for vehicles
to start in the cold winter months. In the summer, however, these fuel formulations combine with warmer
weather to contribute to the formation of smog. Therefore, in the summer months, the evaporative nature
of gasoline (measured in terms of Reid Vapor Pressure and expressed as volatility) must be reduced.
This requires refiners to remove additional components from their gasoline blends, leading to fewer
gallons available from each barrel of oil and a higher cost of production.

In February, refineries begin the process of drawing down winter-blend fuels, which typically can't be
delivered to wholesale outlets after May 1. (Some fuel blends are required weeks or months earlier,
further complicating the system.) To accommodate these deadlines, refiners must estimate fuel needs
months in advance and begin producing the more expensive summer-grade gasoline in February.
Consequently, any unexpected increase in demand can significantly decrease the supply of winter-grade
gasoline, causing the retail price of gasoline to increase while stocks of the more expensive summer-
grade gasolines are built up.

The duration and the severity of the spring price increase has varied over the past six years, with prices
increasing an average of 30-plus cents each spring from early February to the seasonal peak.

On January 30, 2006, the average retail price of gasoline was $2.36, according to EIA.
                             National average price for gasoline in the U.S.:
Year    Beginning of transition period                 Peak seasonal price                        Change
2005    $1.91 (week ending Feb. 7)                     $2.28 (week ending April 11)                   +37
2004    $1.61 (week ending Feb. 2)                     $2.07 (week ending May 24)                     +46
2003    $1.53 (week ending Feb. 3)                     $1.73 (week ending Mar. 17)                    +20
2002    $1.11 (week ending Feb. 4)                     $1.41 (week ending Apr. 8)                     +30
2001    $1.44 (week ending Feb. 5)                     $1.71 (week ending May 14                      +26
2000    $1.33 (week ending Feb. 7)                     $1.68 (week ending June 19)                    +35
                                   RFG requirements take effect in 2000
1999    $0.93 (week ending Feb. 8)                     $1.14 (week ending May 17)                     +21
1998    $1.05 (week ending Feb. 9)                     $1.08 (week ending June 8)                      +3
1997    $1.24 (week ending Feb. 3)                     $1.22 (week ending June 2)                      -2
1996    $1.08 (week ending Feb. 5)                     $1.29 (week ending May 20)                     +21
1995    $1.08 (week ending Feb. 6)                     $1.20 (week ending June 12)                    +12
1994    $1.01 (week ending Feb. 7)                     $1.17 (week ending Aug. 22)                    +16
1993    $1.06 (week ending Feb. 8)                     $1.11 (week ending May 31)                      +5
(Source: U.S. Energy Information Administration)

Further complicating the system is the fact that these specific fuel formulations are not interchangeable,
or fungible. In other words, a formulation sold in one market may not be sold in a neighboring market
because of different regulatory requirements. This means that any product shortage could lead to a
regional price spike as alternative supplies of compliant product are unavailable. Such circumstances
could eventually affect broader regions as supplemental fuel supplies must come directly from the
refineries, perhaps at the expense of nearby markets.

The gasoline distribution system (pipelines, barges, trucks and rail cars that move gasoline from the
refinery to the gas station) that was designed to move a handful of gasoline grades to markets throughout
the nation is now forced to move, keep separate and deliver dozens of different types of gasoline to
specific markets.

For areas that are hundreds of miles away from the refinery that supplies their fuel, the wait for new
supplies can be considerable. Product moves through pipelines at three to eight miles per hour (roughly
walking pace). At these rates, it takes from 14 to 22 days to move petroleum products from Houston to
New York City.

4. U.S. refineries are pushed to the limit and are still recovering from Hurricanes
Katrina and Rita.
In addition to the international crude oil market, a primary factor influencing retail gasoline prices is the
refining sector. In fact, the refining sector contributed 18.1 percent to the retail price of gasoline in 2005.

The last domestic refinery was built in 1976, and since 1981 the number of domestic refineries has
dropped by more than 50 percent. Meanwhile, through 2004 U.S. gasoline consumption has increased
37.4 percent and imports have grown 206 percent. While the number of refineries has been cut in half,
the refining industry has upgraded its existing facilities to increase per-unit capacity by 97.3 percent,
thereby minimizing the overall loss in production capacity to approximately 9 percent. But this expanded
capacity has come at a price.

The typical U.S. manufacturing industry operates at a capacity utilization rate of approximately 82
percent. In 2004, the average U.S. refinery utilization rate was 92.8 percent of capacity, the highest rate
in six years, and in 2005 it reached an estimated 93.0 percent. Although refineries have proven capable
of maintaining such high levels of operability, this leaves little excess capacity to accommodate any type
of supply disruption. When a refinery experiences an unexpected disruption, other refineries are unable to
increase production, thus leaving the market in a shortage situation.

Demand is so strong that the refining system had no choice but to continue to push itself to the limit. In
2005, U.S. gasoline production was 8.66 million barrels per day (3.0 percent over the previous five years’
average) and distillate fuel production was 3.97 million barrels (7.6 percent over the previous five years’
average). The U.S. Energy Information Administration projects that U.S. petroleum demand in 2006 will
increase another 2.3 percent from the 2005 level. This adds cost to the process and increases the
likelihood of production interruptions, each of which impacts the retail price of gasoline.

It appears that 2006 could be worse. Two major refineries were still offline as a result of damage
sustained from Hurricane Katrina as 2006 began: Murphy Oil’s 125,000 barrel-per-day refinery in Meraux,
LA, and BP’s 460,000-barrel-per-day refinery in Texas City, TX. And a number of other refineries that
delayed scheduled maintenance following the hurricanes will undergo maintenance sometime over the
first three months of 2006, totaling as much as 2.8 million barrels per day of capacity, according to the Oil
Price Information Service (OPIS).

Only two developments can ease the pressure on the refining system: reduced consumer demand for
refined petroleum products or increased domestic refining capacity.

The first component is a long-term problem that will not be resolved in the near future. It will require a
national change in consumer behavior, characterized by a much more deliberate approach to enhancing
fuel economy or reducing vehicle miles traveled.

The second option is likewise a long-term problem. Historically, the refining industry has earned a five
percent return on investment, far below the 10 percent required by many market analysts and investors in
New York. The cost of expanding or building a new facility is often reported in the billions of dollars, not to
mention the difficulty in obtaining permits for such work. For example, estimates place the per-barrels cost
of building a new refinery at $17,000, while the per-barrel cost of expanding capacity at an existing facility
typically ranges between $9,000 to $12,000.

The strong upstream (exploration/production and refining) profits earned by the petroleum industry in
2005 have led some to suggest that now might be the time for the industry to invest in new capacity. In
fact, several Members of Congress introduced legislation to enact windfall profit taxes on major oil
companies that failed to reinvest their profits into expanding refining capacity. Others attempted to enact
legislation that would streamline environmental regulations to facilitate the expansion of capacity. None of
these proposals were signed into law in 2005, but political dynamics in 2006 could reinvigorate such
efforts.

Regardless, it is likely that the market in 2006 will remain tightly balanced with strong demand for refined
petroleum products and limited spare capacity to ensure the uninterrupted, efficient operation of the
nation's refining system. Should there be a refinery fire or other unexpected disruption, or another
devastating hurricane season, the results could be significant for the national and international markets.
There remains no excess capacity to compensate for such disruptions, and regions could experience
price volatility in excess to the normal course of operations.

5. The presence of boutique fuels compromises the efficiency of the market and
could lead to regional supply shortages and prices spikes.
The condition of the nation's gasoline distribution infrastructure remains a significant challenge for the
industry in 2006 and beyond. Throughout the United States, individual localities and states have adopted
specific fuel formulation regulations to control for specific air quality concerns. While many of these
regulations have been environmentally successful, they have sacrificed the efficiency of the distribution
system. Today, the U.S. pipeline system, designed to originally handle six fuel types, transports and
delivers more than 90 distinct products, including gasoline, on-road and off-road diesel fuel, home heating
oil, kerosene, and jet fuel. (Ethanol cannot be transported via pipeline and instead must be trucked.) With
gasoline alone, there are approximately 20 distinct fuel formulation requirements, not including the
multiple octane grades marketed. Each product must be kept segregated and distinct from the others and
delivered to its specific market. If there is any disruption to the delivery schedule, the integrity of the entire
distribution system can be compromised.




The proliferation of these unique, "boutique fuels" has affected the efficiency of the pipeline system,
reduced the storage capacity for specific products at terminals and contributed to the loss of spare
capacity at refineries. Rather than producing, delivering and storing interchangeable product for each
market, the system now must operate according to small market regulations, thereby rendering each
market more susceptible to disruption and resultant shortages and price spikes than would otherwise be
the case. In some instances, retailers operating in a market experiencing a supply disruption must travel
more than 500 miles one way to obtain compliant product for sale to their consumers because product is
simply not available anywhere closer. This is neither time nor resource efficient.

The greater consumer demand and the more tightly balanced the supply situation, the more likely there
could be a disruption in the distribution system. The Energy Policy Act of 2005, which contained
legislation prohibiting the adoption of new boutique fuels, empowered the U.S. Environmental Protection
Agency (EPA) to intervene to offset supply shortages, like those caused by the hurricanes in 2005. By
authorizing the temporary sale of non-compliant gasoline, and diesel fuel, in markets where shortages
were experienced or anticipated, EPA was able to mitigate the market implications of the disaster. The
boutique fuels provisions of the legislation not only specifically authorize EPA to grant these temporary
waivers, they also protect market participants from legal retribution when abiding by such administrative
orders. Such certainty provided necessary flexibility to the market place and hastened the return to stable
conditions.

6. U.S. demand for fuel, particularly gasoline, continues to increase.
EIA projects total U.S. petroleum demand and total gasoline demand will each increase 1.7 percent in
2006.

Even seemingly incremental increases can overload an already stressed distribution system. Further
complicating the issue is that gasoline demand, which is approximately 43 percent of all U.S. petroleum
demand, begins to increase right as refineries begin to prepare for making summer-blend fuel. U.S.
demand for gasoline significantly increases the first eight months of the year, and is largely unaffected by
price.
                                    U.S. Demand for Gasoline in 2005
      (Demand in millions of barrels/day; price in cents per gallon)

      Month           Demand       Change from prior month Price          Change from prior month
      January            8.775                -4.68%              181.1              -2.74%
      February           8.798                +0.28%              190.6              +5.25%
      March              8.996                +2.25%              202.3              +6.14%
      April              9.130                +1.48%              224.5             +10.97%
      May                9.257                +1.39%              214.3              -4.54%
      June               9.380                +1.33%              215.6              +.061%
      July               9.451                +0.76%              229.0              +6.22%
      August             9.454                +0.00%              253.5             +10.70%
      September          8.897                -5.89%              290.8             +14.71%
      October            9.013                +1.30%              266.4              -8.39%
      November           9.178*               +1.83%              225.7             -15.28%
      December           9.284*               +1.15%              223.8              -0.84%
      Ave.               9.153                                    227.1
      *estimate based on weekly averages for the month
      (Source: U.S. Energy Information Administration)

There is one bright note. On the supply side, compared to the beginning of 2005, the domestic crude oil
and gasoline markets are in better shape. As 2006 began, crude stocks were 13.1 million barrels (4.5
percent) above those in the first week of 2005, and gasoline stocks were up 4.1 million barrels (2.0
percent). The higher level of stocks could help lessen some gasoline supply concerns, provided refining
capacity fully recovers from the hurricanes prior to the beginning of the spring and summer drive seasons.

7. Competition for the gasoline consumer has led to shrinking fuel margins.
While world events largely dictate crude oil prices and the national petroleum infrastructure is a key factor
affecting gasoline supply and prices, local competition also affects gasoline prices. With competition for
the gasoline customer intensifying, consumers are extremely price sensitive. In fact, NACS conducted a
study in 2002 that found that about 40 percent of consumers will switch where they normally shop for
gasoline for a difference of as little as three cents per gallon. And when prices increase, consumers
become even more price sensitive and will often shop around to save as little as a penny a gallon.

When wholesale prices increase, retail prices generally increase at as slower rate as retailers often
engage in a high-stakes game of chicken, absorbing some or all of wholesale price increases until they
see others pass along their wholesale price increases. That was clearly the case in August 2005. When
the average price for a gallon of gasoline skyrocketed following Hurricane Katrina, the Distribution &
Marketing component of the price of gasoline shrunk to 2.1 percent for the month of August, far below the
12.9 percent average from 2000-2004 when the price of gasoline averaged $1.53, according to EIA data.

In fact, it typically takes seven to 12 weeks for wholesale price adjustments to be fully "passed-through" to
retail consumers, according to EIA's 2003 report, Gasoline Price Pass-through.

8. The unexpected disruption generally has the greatest impact on the market.
There has been little achieved in recent years to adjust the systemic challenges that could cause or
compound the effects of supply disruption. The U.S. depends upon oil imports for more than half of its
supply and the international crude oil market is under constant threat of disruption. In Iraq, terrorists have
targeted pipelines and storage facilities to inhibit production; Iran has threatened to reduce imports if it
were to face sanctions over its nuclear ambitions; a long-running civil war in Nigeria continually threatens
supplies of the world’s eighth-largest oil exporter; Venezuelan President Chavez continues to face unrest
in the population and continued stability remains far from certain; and in Russia, the future of the oil
production infrastructure formerly owned and operated by Lukoil is unclear. Those are just the known
concerns. And, there is always the possibility that OPEC could agree to production cuts.

Domestically, refineries will continue to operate at maximum capacity in an attempt to satisfy consumer
demand, leaving them more apt to experience an unanticipated event forcing them to reduce their
production for a period of time. The pipeline systems, constantly under strain and pressure to satisfy the
demand of the multiple markets throughout the nation, have experienced breakdowns in the past several
years and may experience more in the near future. The proliferation of boutique fuels has rendered the
system less able to adjust to such unanticipated disruptions, and may lead to more significant shortages
and price spikes.

And of course, 2005 demonstrated to the world how fragile the United States gasoline system is when
Hurricanes Katrina and Rita ravaged the Gulf Coast.

All of these challenges remain in a year that opened with the average retail price of regular grade
gasoline at $2.24 per gallon, the highest ever recorded at the beginning of a year.
Retailers’ Pain at the Pump
Convenience store retailers dislike higher gasoline prices as much as their customers do, as margins
decrease while costs – particularly credit card fees – increase.

With competition for the gasoline customer intensifying, consumers are extremely price sensitive. In fact,
a NACS consumer study published in 2002 found that about 40 percent of consumers said that they
would switch where they normally shop for gasoline for a difference of as little as three cents per gallon.
Today, consumers are even more price sensitive and will often shop around to save as little as a penny a
gallon.

Declining Margins
When wholesale prices increase, retail prices generally increase at a slower rate as retailers often
engage in a high-stakes game of chicken to remain competitive, absorbing some or all of wholesale price
increases until they see others pass along their wholesale price increases.

In 2004, retail gross margins were at a 20-year low as a result of gasoline prices jumping from an average
of $1.56 in 2003 to $1.85 per gallon in 2004. NACS data shows that gross margins dropped from 8.8
percent in 2003 to 7.2 percent in 2004 – their lowest level since 1984. Despite the nearly 40-cent increase
in the cost of a gallon of gasoline, retail gross margins dropped 1.0 cents per gallon, according to NACS
data.

Margins continued to erode in 2005 as prices climbed further, and this was never more evident than after
Hurricane Katrina hit on August 29. The next day, August 30, oil prices hit a record $70.85 per barrel, and
wholesale gasoline prices shot up, in some cases, more than $1.00 per gallon overnight. Meanwhile,
retailers held back the full wholesale price increase, and in many cases were losing 30 to 50 cents per
gallon. This is clearly demonstrated in data collected by the U.S. Energy Information Administration (EIA).
For the month of August 2005, when gasoline prices averaged $2.49 per gallon, the “Distribution &
Marketing” component of a gallon of gasoline (pipeline and other delivery costs, plus retailer costs) was
2.1 percent, which doesn’t even cover the cost of credit card fees, which approach 3 percent.

For all of 2005, EIA data shows that the Distribution & Marketing component was 9.0 percent, significantly
below the 11.6 percent in 2004, when gasoline prices averaged $1.85, and far below the 12.9 percent
average from 2000 to 2004, when gasoline prices averaged $1.53. And despite a nearly 43-cent rise in
gasoline prices for the year 2005 (to $2.27), the Distribution & Marketing component dropped 1.0 cents
per gallon compared to the year prior.

(Margins were even tighter for diesel fuel in 2005. For the year, EIA’s Distribution & Marketing”
component was 7.9 percent. On a cents-per-gallon basis, this component was 18.9 cents per gallon
based on the average price of diesel fuel at $2.40 per gallon.)

From 2003 to 2005, according to EIA data, annual average gasoline prices jumped 71.7 cents, while
“Distribution & Marketing” has dropped 1.6 cents. Since most of the transportation costs have either
increased or remained the same, it’s obvious that retailer margins have tightened.

The reason for continued margin erosion is that it typically takes seven to 12 weeks for wholesale price
adjustments to be completely “passed-through” to retail consumers, according to EIA’s 2003 report,
Gasoline Price Pass-through. During this time, retailers typically absorb some of the wholesale price
increases by reducing their margins.

Allocations
When gasoline is in short supply, retailers face more than just tighter margins. They may have difficulty
obtaining fuel without additional surcharges. During severe supply/demand imbalances (such as after
Hurricanes Katrina and Rita) retailers with supply contracts may be put on allocation, or restricted access
to supply.

Retailers on allocation can only get a percentage of what they got on the same day last year — typically
suppliers initially begin with 100 percent allocations, which then decrease as supply conditions worsen. In
this case, retailers can suffer both low margins and low volume, based on restricted supply. Retailers can
get more than their specified allocations, but they must pay a lifting fee — similar to a luxury tax in sports
— where they have to pay up to 25 cents, 50 cents, sometimes as much as $1.00 a gallon more to get
extra product. Allocations only apply to retailers selling branded gasoline, and are intended by refiners to
help maintain supply so that they can distribute product to all their contracts when supplies are or could
be tight.

Unbranded retailers without supply contracts don’t face allocations. However, they usually have it worse
when supplies tighten. Because they don’t have a supply contact, they get last dibs on gasoline, and they
pay the going rate, which is usually the highest. This is similar to buying a walk-up airline ticket — you
can only buy what is left and you pay a premium for it. If there are no seats available, you don’t fly; if there
is no gasoline available, you don’t open for business.

The reality is, however, that no matter how much of the wholesale price increase they pass on, retailers
still get accused of “gouging.”

Gouging Accusations
It didn’t matter if a retailer was branded or unbranded, gouging accusations were a concern in 2005. And
lawmakers across the country tried to weigh in on how they thought a fair price to charge for gasoline
should be defined.

On the federal level, one particularly misguided effort was undertaken by Rep. Alcee Hastings (D-FL),
who proposed legislation that included a “GOUGE Act” that would impose penalties on retailers who
raised prices more than the monthly rate of inflation. The U.S. Department of Labor reported that inflation
in 2005 was 3.4 percent, meaning that if this law were enacted, retailers could have only increased their
prices by mere pennies when wholesale prices skyrocketed a dollar or more.

During his Sept. 7, 2005, testimony before the U.S. House Energy and Commerce Committee, NACS
Chairman Bill Douglass, CEO of Douglass Distributing Co. (Sherman, TX), had this to say on the matter:

    "I am here to respond to allegations that I, and my industry, have taken advantage of this tragedy
    [Hurricane Katrina] by 'gouging' our customers by raising retail motor fuel prices. Such allegations are
    personally offensive to me, and in general, they reflect a lack of understanding of the market events
    that have led to the gasoline and diesel fuel price spikes of the last 10 days. While it is certainly
    possible that some 'bad actors' have sought to exploit this crisis for personal gain, I can assure you
    that their actions are not the actions of the vast majority of our industry."

On the state level, attorneys general, responding to consumer complaints about rising prices, sued
retailers in a number of states for gouging. In some cases, retailers reached settlements with the state
rather than incur the costs of defending themselves in court. Some retailers in New Jersey, for example,
were charged with raising their prices more than once a day (an arcane state law prohibits more than one
price change a day), even though their wholesale prices changed multiple times.
Rising Credit Card Fees
Gross margins aren’t to be confused with profit margins. After factoring in expenses, most retailers make,
at best, a few cents per gallon in pretax profit, and may even lose money on some sales when margins
are tight and credit card expenses are high.

For stores that sell gasoline and accept plastic, credit card fees cost stores an average of $30,996
in 2004, a figure approaching the average per-store pretax profit of $36,095. On an industry-wide basis,
the total cost of credit/debit fees was $3.3 billion.

When gasoline prices increase, more people pay by plastic, either because they don’t have the cash on
hand (or don’t want to spend it) or because they try to displace the pain of the higher prices until their next
billing statement.

The overall increase in average annual gas prices from 2003 to 2004 (from $1.56 to $1.85 per gallon) led
to a significant increase in the use of plastic at the pump, with 54 percent of all gasoline customers paying
with plastic in 2004. The huge increase in gasoline prices in 2005 has accelerated that trend, and NACS
estimates that 70 percent of all motor fuels purchases for the first half of 2005 were by plastic, and that
figure approached 80 percent by October 2005.

One implication for the convenience store industry is that as credit card usage and gasoline prices
increase, so does the payment amount per fill-up (since it is largely computed on a percentage basis).
With razor-thin margins for retailers selling gasoline, credit card fees are often more than the retailer’s
profit — or even gross — margin.

Convenience store retailers pay upwards of 3 percent in credit card fees on each gallon of gasoline sold,
no matter what the price of gasoline. During his Sept. 7, 2005, testimony before the U.S. House Energy
and Commerce Committee, NACS Chairman Bill Douglass, CEO of Douglass Distributing Co. (Sherman,
TX), had this exchange with Rep. Joe Barton (R-TX):

      Rep. Barton: Mr. Douglass, let me make sure I understand something you just said. If I come into
      one of your stations and I use my Visa credit card and I buy one gallon of gas on it, you're charged
      seven cents.
      Mr. Douglass: Yes, sir.
      Rep. Barton: But if I buy two gallons, you're charged 14 cents?
      Mr. Douglass: Yes, sir.
      Rep. Barton: If I charge 10 gallons, you're charged 70 cents? So the more I buy, the more you're
      charged.
      Mr. Douglass: Correct.
      Rep. Barton: Even though it doesn't cost them any more for the transaction if I buy 10 gallons than
      if I buy one.
      Mr. Douglass: That's correct.
      Rep. Barton: That doesn't make a whole lot of sense.

The rise in credit card expenses has led to an increasing number of retailers to consider cash discounts,
once popular in the 1970s. These retailers are generally offering a discount of one to three cents per
gallon for customers paying by cash (although there are some instances where it is even more than that),
sharing the savings of reducing credit cards expenses with their customers. This practice is not permitted
in some states, however.

Debit Holds
As gas prices and the use of plastic at the pump have increased, consumers are increasingly concerned
about the debit “holds” on their accounts, which may cause them to inadvertently overdraw their checking
accounts.
Consumers blame retailers for this problem but the fact is retailers only are responsible for the amount of
the hold; card network rules require that they place holds, and the bank issuing the debit/credit card is
responsible for the length of the hold.

Both Visa and MasterCard require that retailers place holds, or “preauthorizations,” on debit and credit
card gasoline purchases. Most consumers don't notice holds on their credit cards because they have
sufficient credit lines that they don't exceed, even with holds. Holds are standard practice for any
business that accepts plastic as a form of payment in a situation where the final dollar amount to be
assessed is unknown in advance. Holds placed on gasolione purchases are similar to the
preauthorizations that hotels do with a credit card when someone checks in.

Most retailers today have a hold between $50 to $100 to approximate the cost of a fill-up. The amount of
the hold has increased as gasoline prices have increased; $35 was previously a common amount.

For signature-based debit transactions (such as using a check card as a credit card), holds, like the holds
on credit cards that can affect someone's spending limit, can remain in effect for 48-72 hours, since the
processing times for credit and signature debit cards are slower. For PIN-based debit transactions, the
issuing bank is automatically notified once the customers finishes fueling up, and the hold amount should
immediately change to the amount that the customer actually purchased.

Under all normal circumstances, it’s not the retailer who is responsible for continuing the hold, since
credit/debit card network rules make it impossible for the retailer to extend the hold. Retailers have
nothing to gain from holding on to consumers' money – it freezes accounts that could be used to spend
money in the store. Further, retailers do not benefit from fees incurred from overdrafts that happen as a
result of unanticipated holds. Yet, retailers faced mounting consumer ire over this issue as well in 2005.

‘Reason Code 96’—Payment Card Authorization Limits
Authorization limits imposed by some banks can force retailers to cut off gasoline sales at a pre-set
amount, such as $50, which is the current Visa authorization limit (although MasterCard raised its limit to
$75 in response to energy prices), irritating customers with large-tank vehicles like SUVs that are
unavailable to completely fill up.

This situation forces retailers to select one of two bad options. One choice is to adhere to this
authorization limit, and hope that affected consumers don’t take out their frustration on the store by
refusing to return. If these frustrated customers do not immediately drive away and instead stay to
continue fueling up, they must initiate a second “fill-up” authorization, which further alienates customers
and adds more costs for retailers because of the fixed-cost pricing component of interchange related to
the relatively small second sale.

The other option is to allow customers to exceed this authorization limit. Retailers who choose this option
risk having the charge denied by the bank, even if the card is not fraudulent, and lose getting credited for
the entire amount of the sale. Still, many retailers have taken on this risk to reduce customer
inconvenience. (Customers are still assessed the full amount if the retailer is denied payment in this
situation, but the bank, not the retailer, keeps the money, which, with low gasoline margins, can wipe out
the day’s gasoline profits.)

Reduced Sales of Higher Octane Fuel
Sales of premium and mid-grade gasoline, which have healthier margins than regular gasoline, have
declined over the past few years as consumers “trade down” octane levels when prices increase. This
leads to some consumers permanently switching to lower-octane fuel. The sale of mid-grade and
premium has declined from 30.2 percent of gasoline gallons purchased in 1998 to 17.4 percent in 2004.
An Increase in Gasoline Theft
As has been the case for the past several years, increases in the retail gasoline price have led to a
significant increase in gasoline theft, brought on by misdirected consumer anger at higher prices.
Nationwide, gasoline theft cost the industry an estimated $237 million in 2004. The average loss per store
was $2,141 in 2004, but that figure is deceivingly low, since it is based on all convenience stores that sell
gasoline, including those in states that mandate full-serve (New Jersey and Oregon) and stores in areas
where prepay in the norm, such as California and many major metropolitan areas including New York,
Las Vegas, Chicago and Atlanta.

With convenience stores reporting total motor fuels sales of $262.6 billion in 2004, that means that, on
average, one in every 1,100 fill-ups was gasoline theft. While this is not a "conga line" of theft, at a penny
per gallon profit, a retailer would need to sell an extra 4,000 gallons to offset each $40 stolen.

As prices rose in 2005, many retailers reported a surge in gasoline theft, seeing gasoline theft double or
triple the level at some stores compared to previous years. In 2005, some retailers reported gasoline theft
losses per store of more than $400 per week. However, at the same time, a significant number of retailers
began to require that cash customers prepay, to eliminate the problem of gasoline theft. It is difficult to
determine the overall impact on the industry until final numbers are released in April 2006, but it is clear
that gasoline theft significantly increased overall in 2005.

Reduced In-Store Sales
With U.S. drivers consuming an estimated daily 9.1 million barrels of gasoline (there are 42 gallons in a
barrel), every penny increase in the price of a gallon of gasoline costs consumers roughly $3.8 million per
day. With gasoline prices in 2005 approximately 74 cents more than the previous five years’ average, that
costs consumers an extra $102 billion for the year. That increased fuel bill certainly had to impact overall
consumer spending. In fact, Wal-Mart blamed its sluggish sales start during the past two Christmas
shopping seasons on higher gasoline prices. Convenience stores also were affected, and affected more
directly.

Higher gasoline prices can contribute to lower in-store sales, where margins are more robust, because
people have less disposable income. While customers may still spend $40 or $50 at the convenience
store, that money is now all going toward gasoline, as opposed to additional, more profitable in-store
items, such as a cup of coffee or a sandwich.

In South Carolina, the state Board of Economic Advisors estimated that state lottery receipts in 2004
dropped 11 percent to $255 million. With approximately 90 percent of the state’s lottery terminals at
convenience stores selling gasoline, it noted that higher gasoline prices led to less disposable income
and helped reduce lottery sales.

Higher Costs of Goods Themselves
Finally, convenience stores, like all retailers, are hit by higher costs of goods sold, as higher fuel prices
add to the cost of shipping products to the store. Some other retailer channels may be able to pass along
these costs to consumers by raising prices, but many of the items at convenience stores are prepriced or
are at relatively set prices that cannot be increased without increasing the risk of losing customers.
Retailer Margins Shrink as Prices Climb
Gasoline prices for the year 2005 averaged $2.268 per gallon, a nearly 43-cent increase over the average
in 2004. The U.S. Energy Information Administration (EIA) breaks down the cost of gasoline into four
components; three of them increased on a cents-per-gallon basis in 2005: cost of crude oil, refining and
taxes. (About a dozen states have sales taxes on gasoline, meaning the taxes increase as the price
does.) The fourth component, “Distribution & Marketing,” which includes retail margins, declined on a
cents-per-gallon basis, dropping 1.0 cents to 20.5 cents per gallon.

                                    Breakdown of the Retail Price of Gasoline
         Retail Price             Crude Oil            Taxes                Refining                              Distribution &
                                                                                                                     Marketing
        cents/gallon    %     cents/gallon      %    cents/gallon                    %      cents/gallon         %    cents/gallon
2000       148.5       45.6         67.7       28.3      42.0                       14.2        21.1            12.0      17.8
2001       142.6       38.6         55.1       30.1      42.9                       17.1        24.3            14.3      20.4
2002       134.0       42.5         57.0       31.6      42.3                       13.4        18.0            12.5      16.7
2003       155.9       44.0         68.6       27.0      42.1                       14.6        22.7            14.2      22.1
2004       184.9       47.9         88.6       22.9      42.4                       17.5        32.4            11.6      21.5
2005       226.8       53.0        120.2       19.7      44.7                       18.1        41.0            9.0       20.5
Source: U.S. Energy Information Administration
(Note: EIA began tracking this information in January 2000)

However, this is not retailer profit; EIA’s Distribution & Marketing component includes other costs, notably
pipeline, terminal and other transportation expenses. Here are some estimated costs (which vary by
retailer):
     • 4 cents – cost of pipelines/terminals/other costs before distribution to stores
     • 3 cents – distribution to stores
     • 1 cent – inventory fluctuation (drive-offs, underfilling, evaporation)
     • 4 cents – store operating expenses (labor/utilities/insurance/maintenance/etc.)
     • 4 cents – credit card fees1
     • 3 cents – amortization of equipment2

With these expenses totaling approximately 19 cents per gallon, that leaves the retailer with
approximately one to two cents in pretax profit per gallon.

For a point of reference, NACS’ 2004 numbers showed an average retail gross margin of 12.7
cents/gallon, which are comparable to EIA’s numbers after taking out the 7 cents for the costs of
pipeline/terminal costs, as well as distribution to stores.

(Margins were even tighter for diesel fuel in 2005. For the year, EIA’s Distribution & Marketing”
component was 7.9 percent. On a cents-per-gallon basis, this component was 18.9 cents per gallon
based on the average price of diesel at $2.40 per gallon.)




1
  Two-thirds of all transactions in 2005 were paid by credit card. With fees averaging 2.6 percent of transaction cost, 4 cents per
gallon represents the average for all gasoline sales.
2
  Based on 7-year amortization of $300,000 of equipment, with the typical store selling 1.3 million gallons of fuel/year.
From 2003 to 2005, according to EIA data, annual average gasoline prices jumped 71.7 cents, while
“Distribution & Marketing” dropped 1.6 cents. Since most of the transportation costs have either increased
or remained the same, it’s obvious that retailer margins have tightened.

The reason for continued margin erosion is that it typically takes seven to 12 weeks for wholesale price
adjustments to be completely “passed-through” to retail consumers, according to EIA’s 2003 report,
Gasoline Price Pass-through. During this time, retailers typically absorb some of the wholesale price
increases by reducing their margins.

In 2005, gross margins remained tight as wholesale prices climbed most of the year. But the twin price
spikes as a result of Hurricanes Katrina (which made landfall Aug. 29) and Rita (which made landfall
Sept. 24) clearly demonstrate that retail prices do not rise as fast as wholesale (also known as “spot”)
prices.


                                                 National Average Spot Price vs. Retail Price -- 2005

                                     350



                                     300
                  Cents per Gallon




                                                              Retail Price
                                     250



                                     200



                                     150

                                                                                         Spot Price
                                     100
                                           1/7    2/7   3/7     4/7    5/7   6/7   7/7   8/7   9/7    10/7   11/7   12/7
               Source: U.S. EIA; Spot price is average of all blends reported for New York, Chicago, Houston and Los Angeles




Note: Wholesale (or “spot”) prices do not include state and federal taxes, which vary by state but are
approximately 45 cents per gallon.
Diesel Fuel — A New Day Dawning
What happens with diesel fuel impacts more than those who drive diesel-powered vehicles. The United
States economy runs on the backs of diesel-powered trucks. Higher fuel prices add to the cost of shipping
food, clothes and other goods, and that expense eventually shows up in the retail prices everyone pays.
Therefore, although not all consumers pay attention to diesel fuel prices, the movement of this market has
significant implications for the economy, and 2006 will welcome a new era in diesel fuel regulatory
requirements.

Convenience Stores and Diesel Fuel
Convenience stores sell a considerable amount of diesel fuel. In 2004, nearly 40 percent of all
convenience stores sold diesel fuel and the product accounted for 6.4 percent of the industry’s total motor
fuels sales. In 2004, when retail prices averaged $1.82, retailers’ diesel fuel gross margins averaged 11.9
cents per gallon, or 6.5 percent of the retail price. Compared to 2003, when diesel prices averaged $1.53,
margins were up 0.6 cents but down nearly 1 percent.

In 2005, retail diesel fuel prices hit new highs, registering a national average retail price of $3.15 in
October and averaging $2.40 for the year, 59 percent more than the previous five-year average of $1.51
and 60 cents per gallon more than in 2004. The U.S. Energy Information Administration (EIA) breaks
down the retail price of diesel fuel into four major components (see chart below). According to EIA, crude
oil and refining posted significant gains in 2005, contributing a combined 71 percent to the retail price of
diesel:

                             Breakdown of the Retail Price of Diesel Fuel
                Retail                                                                     Distribution/
                               Crude Oil              Taxes              Refining
                Price                                                                       Marketing*
                             %    Cents/gal     %     Cents/gal     %      Cents/gal      %     Cents/gal
   2003          $1.508    45.7      68.9      32.0      48.3      11.1       16.8      11.1       16.7
   2004          $1.808    48.9      88.5      27.0      48.9      14.9       27.0       9.0       16.3
   2005          $2.399    50.1     120.2      21.2      50.9      20.8       49.9       7.9       18.9
  Average        $1.905    48.3      91.9      26.8      50.9      15.6       29.8       9.3       17.8
*EIA’s Distribution & Marketing component includes other costs, notably pipeline, terminal and other
transportation expenses.

What Happened to Diesel Fuel in 2005?
Diesel fuel prices, like gasoline prices, are heavily influenced by the crude oil market, which accounts for
about half of the retail price. In 2005, crude oil prices increased 83 percent above 2004 to average
$56.62, thereby leading to a bump in retail diesel prices. But this was not the end of the story.

Production and demand for diesel fuel were both up for the third year in a row, with production (up 3.9
percent) outpacing demand (up 1.3 percent). However, distillate fuel (diesel fuel and home heating oil,
which are essentially the same product) imports were down nearly 11 percent from 2004, ultimately
leading to a tighter market for diesel fuel, changing the supply-demand balance and contributing to
higher prices.

Diesel fuel prices historically are lower than gasoline prices, but in 2005 the reverse was true. Even
though the federal tax on diesel fuel is higher than that for gasoline, unleaded regular gasoline is more
difficult and expensive to refine than diesel fuel, generally resulting in higher wholesale prices for
gasoline. For a calendar year, diesel fuel has not cost more than gasoline since 2000. Why the switch?

For one, in the United States, the demand for diesel fuel is almost inverse to that for gasoline. Demand
for gasoline bottoms out in January and February and slowly increases until its peak in August, and then
drops after Labor Day weekend, as vacation travel dramatically decreases. Demand for diesel fuel, on the
other hand, increases in September, since it is heavily used in machines for harvesting and transporting
crops. Demand continues in October, the beginning of the heating season, and peaks somewhere
between January and March, depending on the severity of the winter weather. (Diesel fuel and heating
oil, collectively known as "distillate fuel," are very similar, the major difference being that diesel fuel
contains less sulfur.)

Diesel fuel prices actually began to pass those for gasoline in the second half of 2004 when crude oil
prices rose. While the higher cost of crude oil impacted both the gasoline and diesel fuel markets,
gasoline inventories were much healthier than those for diesel fuel, helping to temper price increases.

In 2005, the pattern continued. Diesel fuel prices followed the crude market up throughout the summer,
reflecting the increased price of refinery feedstock. But world demand for diesel fuel increased at a faster
rate than that for gasoline, with demand in China growing substantially, as well as in Europe, which has a
higher percentage of diesel fuel-powered cars than in the United States. As summer approached, diesel
fuel production was also impacted by growing demand for jet fuel as air travel increased. Because both
jet fuel and diesel fuel (but not gasoline) are considered “light” products, refineries that produced more jet
fuel did it at the expense of diesel fuel. When demand began to increase in September, as it usually does,
the combination of low inventories, high demand and lost capacity due to Hurricanes Katrina and Rita
caused diesel fuel prices to peak, reaching $3.15 in early October. After that point, as refineries came
back on line and the market began to stabilize, diesel fuel prices began to ease despite the continued
strong levels of demand.

One critical contributing factor to this late season decrease in diesel fuel prices was the actions taken by
the U.S. Environmental Protection Agency (EPA) to provide additional flexibility to the diesel market
following the devastation cause by the hurricanes. Using new authorities granted to him by the Energy
Policy Act of 2005, the EPA Administrator issued a series of sulfur specification waivers for diesel fuel in
markets throughout the country. By authorizing the use of off-road diesel fuel in on-road vehicles, the
Administrator was able to provide an influx of product into a market desperate to keep the trucks rolling.
Without these actions, it is highly probably that diesel fuel prices would not have peaked at $3.15, but
would have continued to escalate for several additional weeks.

Warmer-than-average months in late fall and early winter also helped ease the pressures on diesel fuel
stocks as demand for home heating oil was not as strong as it had been in past years.

It is worth noting that diesel fuel taxes are higher than those for gasoline. The federal tax per gallon for
diesel fuel is 24.4 cents per gallon, six cents higher than the federal gasoline tax. In addition, according to
the American Petroleum Institute, as of November 2004, the average state tax for diesel fuel was 25.7
cents per gallon, making the average national diesel fuel tax 50.1 cents per gallon. Hawaii has the highest
combined state and federal diesel fuel tax, which the American Petroleum Institute estimates to be 65.1
cents per gallon; Alaska's is the lowest at an estimated 32.4 cents.

What to Expect in 2006

There will be additional diesel fuel supply and demand challenges this year. Beginning in June 2006, the
maximum allowable sulfur content for most on-road diesel fuel must decrease 97 percent, from 500 parts
per million (ppm) to 15 ppm. For four years, the market will offer two distinct diesel fuel formulations —
this new ultra low sulfur diesel fuel (ULSD) and the current low sulfur diesel fuel. Refiners have been
preparing for the implementation of this regulation for several years and are expected to produce
sufficient quantities to satisfy the market. But the challenge is presented further downstream.
The nature of the motor fuels distribution system, including pipelines, terminals and retail distribution,
complicates the effort to deliver compliant ULSD to market due to potential sulfur contamination from
other products. Progress has been made to minimize contamination, and EPA has provided additional
flexibility for the market by providing more time for the distribution system to transition to the new fuel, and
that should facilitate the conversion of the system. Industry groups and EPA are working together to
ensure as smooth a transition as possible and to minimize potential supply disruptions. However, nothing
is certain and the implementation of such a dramatically different fuel regulation will increase the
pressures on the market and perhaps have an impact on overall supply availability.

What the price implications of the new regulations will be for the market are impossible to predict. What is
quantifiable is the investment of more than $8 billion by the refining industry to upgrade its facilities to
produce ULSD.

Meanwhile, it does not appear that the crude oil market is going to retreat from the $60 per barrel level.
In fact, EIA predicts that crude oil this year will average $63 per barrel. Given that this projection
represents a 12 percent increase over 2004, and remembering that crude oil contributes approximately
50 percent to the retail price, there could be a direct impact on diesel fuel prices this year. Furthermore,
as the economy continues to grow, demand for diesel fuel will remain strong. And, there are no
assurances against a repeat of last year’s hurricane season, which would again dramatically affect the
market.
The U.S. Petroleum Industry: Statistics, Definitions
Demand
Oil
World demand for oil was approximately 83.4 million barrels per day in 2005, and will increase to 85.2
million barrels in 2006.
(Source: International Energy Agency)

The United States uses more petroleum for transportation needs (67 percent of total demand) than for
heat and power. As a result, demand peaks in the summer as people travel more, the opposite of most of
the rest of the world where demand for oil peaks in the coldest months.
(Source: U.S. Energy Information Administration)

U.S. petroleum demand in 2006 is projected to average 21.1 million barrels per day, up 2.3 percent from
the 2005 level.
(Source: U.S. Energy Information Administration)

Strong demand is expected to keep oil prices high. West Texas Intermediate oil prices averaged $41.44
per barrel in 2004, increased 36 percent to $63.27 per barrel in 2005, and are projected to jump another
12 percent in 2006 to $63.27 per barrel.
(Source: U.S. Energy Administration, Short-Term Energy Outlook, released Jan. 10, 2006)

Gasoline/Diesel Fuel
It is projected that Americans will drive an average of 8.2 billion miles every day in 2006.
(Source: U.S. Energy Information Administration)

U.S. gasoline consumption in 2005 averaged 9.145 million barrels per day (approximately 384 million
gallons per day, or about 35 million fill-ups per day). (Source: American Petroleum Institute)

Demand for diesel fuel in 2005 exceeded 3 million barrels per day in 2005. Deliveries (a measure of
demand) of low-sulfur distillate, commonly referenced to as diesel fuel, reached 3.04 million barrels per
day, or more than 46 billion gallons for the year.
(Source: American Petroleum Institute)

Total U.S. motor fuels (combined gasoline and diesel fuel) consumption in 2005 was 12.183 million
barrels per day, or 186.8 billion gallons for the year. With 231 million registered vehicles on the road
(2003 data), that means that each vehicle used an average of about 810 gallons of fuel in 2005.
(Sources: U.S. Department of Transportation, Federal Highway Administration; American Petroleum
Institute)

U.S. gasoline demand is approximately 43 percent of the United States’ petroleum needs. Here are the
components that are typically made from a barrel of oil:

    •   Gasoline:                         42.7 percent
    •   Diesel and heating oil:           23.5 percent
    •   Jet fuel:                         9.8 percent
    •   Heavy fuel oil:                   4.3 percent
    •   Liquefied petroleum gas:          4.3 percent
   • Other products:                   21.8 percent
(Source: Government Accountability Office analysis of 2000-03 U.S. Energy Information Administration)

U.S. demand for gasoline significantly increases beginning every February, and did so again in 2005.

                                             Demand              Change from
                    Month             (millions of barrels)      prior month
                    January                   8.775                  -4.68%
                    February                  8.798                 +0.28%
                    March                     8.996                 +2.25%
                    April                     9.130                 +1.48%
                    May                       9.257                 +1.39%
                    June                      9.380                 +1.33%
                    July                      9.451                 +0.76%
                    August                    9.454                 +0.01%
                    September                 8.897                  -5.89%
                    October                   9.013                 +1.30%
                    10-month avg.             9.115
                           (Source: U.S. Energy Information Administration)


Supply
U.S. Imports
The U.S. imported 13.49 million barrels per day of crude oil and finished petroleum products in 2005.
Imports accounted for 65 percent of U.S. petroleum consumption in 2005.
(Source: American Petroleum Institute)

The top five importers of petroleum (crude oil and finished products) to the United States account for
about 64 percent of all U.S. imports:
   • Canada (2.139 million barrels per day)
   • Mexico (1.621 million barrels per day)
   • Saudi Arabia (1.525 million barrels per day)
   • Venezuela (1.501 million barrels per day)
   • Nigeria (1.138 million barrels per day)
(Source: U.S. Department of Energy, Jan.-Nov. 2005 averaged data)

The United States imports the majority of its oil from non-OPEC countries: 45 percent of total imports
came from OPEC; only 19 percent of total imports came from Persian Gulf countries.
(Source: American Petroleum Institute, Jan.-Oct. 2005 averaged data)

The top five importers accounted for more than one-third of all U.S. petroleum consumed (36.3 percent
overall):
    • Canada (9.3 percent)
    • Saudi Arabia (7.5 percent)
    • Venezuela (7.4 percent)
    • Mexico (6.6 percent)
    • Nigeria (5.5 percent)
(Source: American Petroleum Institute, Jan.-Oct. 2005 averaged data)

Gasoline imports in 2005 increased more than 20 percent; for the year they averaged more than 1 million
barrels per day for the first time ever.
(Source: American Petroleum Institute)

Stocks and Inventories
Domestic crude oil inventories (or “stocks”) have increased over the past two years. As of January 2006,
they were approximately 320 million barrels, which was an increase of about 30 million barrels from the
same time in 2005. In January 2004, they dropped below the “Lower Operational Inventory” of 270 million
barrels and were at their lowest levels since 1975.
(Source: U.S. Energy Information Administration)

There are 7-8 billion barrels of oil tied up in worldwide stocks at any given time, from the wellhead to the
consumer, filling tankers, pipelines, railcars, trucks and linking all of the markets.
(Source: U.S. Energy Information Administration)

Holding inventory costs money – approximately $1.50 a barrel for oil if a company owns the tank storage
facility and $4 per barrel is the storage is rented. For gasoline, the costs are approximately $2 and $6, or
about 1 cent per gallon per month if the storage space is rented. Thus, companies try to manage their
inventories as efficiently as possible.
(Source: U.S. Energy Information Administration)

Strategic Petroleum Reserve
The U.S. Strategic Petroleum Reserve (SPR) is the largest stockpile of government-owned emergency
crude oil in the world. It was established in 1975 in the aftermath of the 1973-74 oil embargo to provide
emergency crude oil supplies for the U.S. The oil is stored in underground salt caverns in Texas and
Louisiana.

In November 2001, President Bush directed the U.S. Department of Energy to fill the SPR to its capacity
(capacity as of January 2006 is 727 million barrels). In January 2006, it held approximately 684 million
barrels, a decrease from the high of 700.7 million barrels reached in late August 2005, prior to Hurricanes
Katrina and Rita.

The maximum drawdown capability of the SPR is 4.4 million barrels per day. It would take 13 days from
the time a Presidential decision were made to tap the reserves for oil to enter the U.S. market.
(Source: U.S. Department of Energy)

Refining
Refinery inputs, a measure of activity at refineries, were down about 2 percent in 2005 because of the
impact of hurricanes in 2005. This was the first annual decline in three years. At the end of 2005,
approximately 1 million barrels per day of capacity was still offline.
(Source: American Petroleum Institute)

Total U.S. refinery output in 2006 was expected to be about 0.3 percent less than in 2004 as a result of
outages caused by Hurricanes Katrina and Rita.
(Source: U.S. Energy Information Administration, Annual Energy Outlook 2006)

The average utilization rate for U.S. refineries was 93.0 percent of its 16.9 million-barrels-per-day capacity
in 2004, and is expected to increase to 95.1 percent in 2025.
(Source: U.S. Energy Information Administration, Annual Energy Outlook 2006)

The largest refinery in the United States is the ExxonMobil Baytown, TX facility, which produces 557,000
barrels per day.
(Source: U.S. Energy Information Administration, 2004 data)

Planned periodic shutdowns of refineries, called “turnarounds,” allow for the regular maintenance,
overhaul, repair, inspection, and testing of plants and their process materials and equipment. They are
scheduled at least 1-2 years in advance, and usually when demand for refined product is at its lowest
level, typically early in the year. At this time, refineries also convert their “crackers” so that they can refine
summer-blend fuel.
(Source: American Petroleum Institute)
The length of a refinery turnaround is typically 1-4 weeks, depending on the unit and the amount of
maintenance that needs to be done. The industry average is about four years between turnarounds for
catalytic cracking units.
(Source: American Petroleum Institute)

The total number of U.S. refineries has been significantly reduced since 1980. Approximately half of the
U.S. refineries have closed since then; as of January 2005, thee were148 refineries in United States (plus
two in Puerto Rico and one in the U.S. Virgin Islands). The last major refinery built in the United States
was in 1976.
(Source: U.S. Energy Information Administration)

Distribution
Tankers
Shipping oil from Venezuela to the U.S. takes approximately 6-8 days (roundtrip); shipping oil from the
Middle East to the United States takes between 40 and 45 days (roundtrip). During this journey, the price
– and ownership – of the oil can change a number of times.
(Source: American Petroleum Institute)

Crude oil from the Middle East is moved mainly by Very Large Crude Carriers (VLCCs) capable of
delivering 2 million barrels per trip.
(Source: U.S. Energy Information Administration)

Pipelines
Pipelines are, by far, the most important petroleum supply line in the United States for transporting crude
oil, refined fuel and raw materials. Pipelines move nearly two-thirds (66 percent) of the ton-miles of oil
transported annually. The rest is transported via water carriers (28 percent), trucks (4 percent) or rail (2
percent).
(Source: Association of Oil Pipe Lines)

Product pipelines, which range in size from eight inches to over 30 inches, transport more than 50 refined
petroleum products such as: various grades of motor gasoline, home heating oil, diesel fuel, aviation fuel,
jet fuels, and kerosene.
(Source: Association of Oil Pipe Lines)

Interstate pipelines deliver more than 540 billion gallons of petroleum each year, of which 59 percent is
crude oil; the remaining is refined product. The cost to transport a barrel of refined gasoline from Houston
to the New York harbor is about $1, which equates to about 2.5 cents per gallon.
(Source: Association of Oil Pipe Lines)

The Colonial Pipeline is the major product pipeline that stretches from Texas to New Jersey, transporting
almost 40 different formulations of gasoline alone – different grades of each mandated type of gasoline,
the requirements for which vary seasonally and regionally. Liquefied ethylene, propane, butane, and
some petrochemical feedstocks are also transported through oil pipelines.
(Source: Association of Oil Pipe Lines)

Product moves through pipelines at three to eight miles per hour (roughly walking pace) depending upon
line size, pressure, and other factors such as the density and viscosity of the liquid being transported. At
these rates, it takes from 14 to 22 days to move liquids from Houston to New York City.
(Source: Association of Oil Pipe Lines)

There are approximately 200,000 miles of oil pipe lines in the United States; they are in all 50 states.
(Source: Association of Oil Pipe Lines)
Wholesale
Petroleum products may be sold at any of the following levels:
    • Spot market – refers to the one-time sale of a quantity of product “on the spot,” in practice
        typically involving quantities in thousands of barrels at a convenient transfer point, such as a
        refinery, port, or pipeline junction. Spot prices are commonly collected and published by a number
        of price reporting services.
    • Terminal, or “rack” – sales of product by the truckload (typically about 8,000 gallons) at the
        loading rack of a product terminal, supplied from a refinery, pipeline, or port.
    • Dealer tankwagon, or “DTW” – sales of a truckload or less of product, delivered into storage at a
        retail outlet.
    • Retail – sales to the consumer, normally occurring at a service station, convenience store, or
        other retail outlet. (Larger consumers, such as commercial or government vehicle fleets, may buy
        directly from wholesalers in larger quantities.)
(Source: “Gasoline Price Pass-through,” published January 2003 by the U.S. Energy Information
Administration)

Taxes
The federal excise tax on gasoline is 18.4 cents per gallon and 24.4 cents per gallon for diesel fuel.

Taxes comprised 19.7 percent of the cost of a gallon of gasoline in 2005; they have comprised an
average of 26.6 percent of the retail price of gasoline since 2000.
(Source: U.S. Energy Information Administration, averaged data, 2000-2005)

The U.S. average gasoline tax in 2005 (combined state and federal taxes) was 45.9 cents per gallon in
2005, factoring in volume-weighted average state taxes.
(Source: American Petroleum Institute)

State motor fuels taxes alone in 2003 totaled $33.26 billion.
(Source: U.S. Department of Transportation, Federal Highway Administration)

Retail
Prices
Over the past six years, crude oil has represented 45.3 percent of the retail price of gasoline, but
averaged 53.0 percent of the cost of gasoline in 2005.
(Source: U.S. Energy Information Administration averaged data, 2000-2005)

In general, with 42 gallons in each barrel of oil, a $1 increase in the price of a barrel of oil roughly
translates to a 2.4-cent increase at the pump.

Estimates showed that the price “pass-through” from the spot to the retail market is complete within two-
and-one-half months, with about 50 percent of the change occurring within two weeks and 80 percent
within four weeks. The average speed of pass-through is significantly more rapid for diesel fuel, possibly
reflecting fewer middlemen, on average, transacting for each gallon of diesel fuel as opposed to gasoline.
(Source: “Gasoline Price Pass-through,” published January 2003 by the U.S. Energy Information
Administration)

Over the past six years, crude oil prices have fluctuated between a low of $18.28 in November 2001 to a
high of $70.85 per barrel on August 30, 2005, the day after Hurricane Katrina made landfall. Gasoline
prices fluctuated between a low of $1.06 in December 2001 to a high of $3.06 in September 2005.
(Source: U.S. Energy Information Administration data)

In 2005, gasoline prices (regular grade) were at their lowest level as the year began, $1.78/gallon on Jan.
3, and experienced a seasonal peak on April 11 when prices reached a then-record $2.28/gallon.
Gasoline prices fell for the next six weeks as oil prices dropped, with gasoline prices reaching a low of
$2.10/gallon on May 30. However, prices climbed throughout the summer as oil prices increased, and
following Hurricane Katrina, gasoline prices peaked at $3.07 on Sept. 5. Over the next three months, oil
prices retreated, and gasoline prices followed suit, hitting a low of $2.15 on Dec. 4, before climbing
slightly to reach $2.20 at year’s end (Dec. 26)
(Source: U.S. Energy Information Administration weekly data)

Over the past six years, the seasonal transition to summer-blend fuel has helped gasoline prices increase
an average of more than 32 cents each spring.

                      Year      Price 1st week in Feb   Peak seasonal Increase
                                                              price
                      2005         190.9 (Feb. 7)       228.0 (April 11)      +37.1
                      2004         161.6 (Feb. 2)       206.4 (May 24)        +44.8
                      2003         152.7 (Feb. 3)       172.8 (Mar. 17)       +20.1
                      2002         111.6 (Feb. 4)        141.3 (Apr. 8)       +29.7
                      2001         144.3 (Feb. 5)       171.3 (May 14)        +27.0
                      2000         132.5 (Feb. 7)       168.1 (June 19)       +35.6
                             (Source: U.S. Energy Information Administration)

Branding
While the majority of the roughly 111,000 convenience stores selling gasoline are “branded” outlets
selling a specific major oil company’s brand of fuel, NACS estimates that about 2,900, or less than 3
percent, are owned and operated by own of the five major oil companies.

Top five branded retail outlets by company in 2004:
    • Shell Oil Products U.S. (15,821 sites)
    • BP America Inc. (14,200 sites)
    • Citgo Petroleum Corp. (13,694 sites)
    • ConocoPhillips (13,300 sites)
    • ExxonMobil (12,119 sites)
(Note: These figures include all gasoline retailers, not just convenience stores)
(Source: National Petroleum News’ Market Facts 2005)

Margins
Retailer gross margins for motor fuels continue to erode, and in 2004 hit at their lowest level, on a
percentage basis, since 1984 when they were 6.0 percent:
        • 2004 gross margin: 6.9 percent
        • 2003 gross margin: 8.8 percent
        • 2002 gross margin: 9.1 percent
        • 2001 gross margin: 9.2 percent
        • 2000 gross margin: 9.3 percent
        • 1999 gross margin 11.7 percent
(Source: NACS data)

Retail consultant Francis Bologna estimates that for each 35-cent increase in price (the average price
increase each spring since 2000), retailers lose a penny in margin.

Sales
Motor fuels sales in convenience stores totaled $262.6 billion in 2004, with a total of 143.5 billion gallons
sold.
(Source: NACS data)

Motor fuels sales accounted for nearly two-thirds of the convenience store industry’s sales in 2004 (66.5
percent). However, because of low margins, motor fuels sales contributed only about one-third of total
store gross margins dollars (36.6 percent)
The number of convenience stores selling motor fuels has increased significantly in 30 years:
       • 2004: 110,895 stores (79 percent of all stores)
       • 1994: 70,704 stores (72 percent of all stores)
       • 1984: 42,650 stores (50 percent of all stores)
       • 1974: 4,943 stores (15 percent of all stores)
(Source: NACS data)

Motor fuels sales per convenience store have increased in 30 years:
        • 2004: 107,852 gallons/month
        • 1994: 78,000 gallons/month
        • 1984: 42,000 gallons/month
        • 1974: 17,370 gallons/month
(Source: NACS data)

Motor fuels sales at convenience stores are an increasing part of total industry revenues:
          • 2004: $262.6 billion in motor fuels sales (66.5% of total sales)
          • 1994: $70.6 billion in motor fuels sales (51.0% of total sales)
          • 1984: $24.1 billion in motor fuels sales (36.2% of total sales)
          • *1975: $0.5 billion in motor fuels sales (6.1% of total sales)
* first year NACS tracked data)
(Source: NACS data)

Sales of premium and mid-grade have declined over the past few years as consumers trade down octane
levels when prices increase. This leads to some consumers not returning to higher octanes as prices
decline. The sale of mid-grade and premium has declined from 30.2 percent of gasoline gallons
purchased in 1998 to 17.4 percent in 2004.
(Source: NACS data)

                 The Change in Octane Grade Sales (percent of gasoline gallons sold)
          Year      Price    % Change    Regular     % Change      Mid-grade Premium
          2004      $1.83      +24.5       81.4         +3.7          10.2         7.2
          2003      $1.55      +10.7       78.5         +1.6          12.1         9.4
          2002      $1.40       +1.4       77.3         -2.4          13.0         9.7
          2001      $1.38       -3.4       79.2         +1.4          12.5         8.3
          2000      $1.43      +25.4       78.1         +6.5          13.1         8.8
          1999      $1.14       +8.6       73.3         +9.5          14.4        12.4
          1998      $1.05      -11.0       69.8         -7.7          15.4        14.8
                                       (Source: NACS data)

In 2004, an estimated $237 million was lost to gasoline theft. With overall gasoline sales of $262.6 billion,
this means one in every 1,100 fill-ups was stolen, or roughly one or two per week per store.
(Source: NACS data)

Hypermarkets
As of July 2005, 3,860 hypermarket store sites sold gasoline (compared to the 110,000-plus convenience
stores that do), but that figure continues to grow. Hypermarkets comprise approximately 2-3 percent of
the gasoline retailing outlets, but capture 7.7 percent of total gasoline sales, compared to the
approximately 75 percent sold by convenience stores.
(Source: Energy Analysts International)

Wal-Mart has approximately 1,294 gasoline retailing sites inclusive of Wal-Mart sites (Optima, Murphy
and Mirastar), Neighborhood Stores and Sam’s Clubs.
(Source: Energy Analysts International)
Most of the hypermarkets selling gasoline are supermarket chains (2,042 stores), followed by discount
chains (1,044 stores) and mass merchandise/club chains (764 stores). However, because of their
massive volume of gasoline sales, mass merchandisers/club chains outsell all other hypermarket formats,
averaging 445,00-plus gallons per store per month, well ahead of the approximately 298,000 gallons per
month per sold overall by hypermarkets and the 108,000 gallon per month per store at convenience
stores
(Source: Energy Analysts International).

In 2003, 18 percent of new supermarkets had gas pumps. And almost 62 percent of grocery stores that
were scheduled to be constructed in 2004 including fueling in their blueprints.
(Source: Food Marketing Institute)

Credit Card Fees
For stores that sell motor fuels and accept plastic, credit/debit card fees cost the stores an average of
$30,996 in 2004. For the convenience store industry, the total cost of credit/debit fees was $3.3 billion,
making this the third-largest expense at the store level.
(Source: NACS data)

In 2004, credit/debit card usage at the pump at convenience stores was 53.7 percent. However, the huge
price increases in 2005 accelerated the trend to pay by plastic, and NACS estimates that upwards of 70
percent of all gasoline purchases are now paid with plastic.
(Source: NACS data)

Glossary of Terms
Balkanization: The end-result of the patchwork quilt of unique fuels required throughout the United
States Unique fuel regulations have created gasoline zones across the U.S. where only certain fuels can
be sold. This “Balkanization” of the fuel supply has made it more expensive and difficult to produce and
deliver gasoline.

Boutique fuels: Unique gasoline blends required for a specific region or metropolitan area of the U.S.
Prior to 1990, six types of gasoline were sold in the U.S. Today, there are approximately 20 unique
gasoline formulations manufactured for, and sold within, specific markets throughout the United States
that are mandated by federal, state, and local governments. These "boutique" fuels are not
interchangeable with fuel blends sold in other areas of the country.

Branded retail outlet: A retailer that sells a motor fuel with the name of a major oil company, but is not
necessarily owned (and is usually not owned) by that oil company. Branded retailers benefit from
marketing and advertising support, consumer brand loyalty, and priority access to gasoline supplies. In
return, the branded marketer pays a surcharge for the use of the brand and the benefits that come with it.

Capacity: A measure of how close a manufacturer is operating at peak efficiency, based on 24-hour
operations. Domestic refineries currently operate at between 93 and 95 percent of capacity (which in
reality is full capacity given refinery downtime for maintenance). By contrast, the average American
industry operates at approximately 82 percent of capacity.

Federal Reformulated Gasoline: Also known as RFG. The 1990 Clean Air Act required the nation’s
most polluted metropolitan areas to sell a special blend of gasoline during summer months in order to
reduce the emissions of ozone forming volatile organic compounds (VOCs) and toxic air pollutants. The
regulations require specific fuel content levels for oxygen, benzene and aromatics and set performance
standards for nitrogen oxides, VOCs and toxics. Requirements vary by region but generally terminals are
required to sell RFG beginning May 1; retailers must sell RFG beginning June 1.

Fungible: Interchangeable. The U.S. gasoline system was designed to facilitate the efficient flow of
gasoline to all regions of the nation, allowing the same gasoline formulation to be sold in all markets. The
system is no longer fungible, with approximately 20 unique gasoline formulations required in specific
markets throughout the United States.

OPEC: The Organization of Petroleum Exporting Countries. OPEC is an international organization of 11
developing countries – from Africa, Asia, the Middle East, and Latin America – that are heavily reliant on
oil revenues as their main source of income. OPEC’s members – Algeria, Indonesia, Iran, Iraq, Kuwait,
Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela – collectively supply about
40 per cent of the world’s oil output, and possess more than three-quarters of the world’s total proven
crude oil reserves. Twice a year, or more frequently if required, the oil and energy ministers of OPEC
member countries meet to decide on its output level, and consider whether any action to adjust output is
necessary in the light of recent and anticipated oil market developments.

PADD: Petroleum Administration for Defense Districts. The U.S. Department of Energy divides the United
States into five regions for planning purposes. The result is a geographic aggregation of the 50 states and
the District of Columbia into five Districts, each operating essentially as its own market. The five districts
are: PADD I (East Coast, PADD II (Midwest), PADD III (Gulf Coast), PADD IV (Rocky Mountain) and
PADD V (West Coast).
(Graphic courtesy of Association of Oil Pipe Lines)




Pass-through: The time from which wholesale price changes fully reach consumers. Wholesale gasoline
price increases — or decreases — paid by retailers are not immediately passed on to consumer, but
spread over a period of time. A large portion of the price change is passed through immediately, with the
rest spread over a period of time that could be as long as eight weeks. Pass-throughs help minimize the
price volatility of gasoline.

Refinery: Where crude oil is refined into a specific blend of gasoline or other fuels (such diesel,
kerosene, etc.) or for other oil-based applications. There are currently only 150 refineries in the U.S. —
less than half the number 20 years ago. In addition, production capacity has decreased from 18.6 to 16.5
million barrels per day since 1981. No new refinery has been built in the United States since 1976.

Replacement costs: The cost to acquire the next shipment of fuel. This price is almost always different
than the cost of the gas that retailers have in their tanks. Because of the enormous volume of fuel sold —
a typical store sells more than 100,000 gallons of gas a month — retailers must price their fuel based on
their estimated cost of the next delivery. Even slight wholesale price variations can increase a retailer’s
replacement cost by hundreds — or even thousands — of dollars. The importance of replacement costs
is particularly acute for smaller businesses, which have less cash on hand to meet payments.

Retailer: Refers to convenience stores that sell motor fuels. As of Dec. 31, 2004, a total of 110,895
convenience stores were selling motor fuels in the U.S. (80 percent of country’s 138,205 convenience
stores). These retailers are also referred to as “petroleum marketers.”

Spot market: This market is usually comprised of motor fuel that has not been pre-allocated to the
integrated or branded outlets. Retailers and other fuel distributors purchase fuel at terminals, or “racks,”
where costs fluctuate based on current prices.

Summer-fuel blends: Several state and local governments have developed fuel regulations to control for
the formation of smog during summer months. These generally require that gasoline sold during the
summer have a lower Reid vapor pressure (RVP), which measures the gasoline’s potential to emit
vapors, which contribute to the formation of smog.

Tight supplies: Describes a situation in which demand for gasoline — or crude oil — exceeds the supply
available, and prices rise based on this supply/demand imbalance. Also known as “market shorts” or
“upsets.”

Ultra Low Sulfur Diesel (ULSD): ULSD is a clean-burning diesel fuel that is defined by the United States
Environmental Protection Agency (EPA) to have a maximum sulfur content of 15 parts per million (ppm).
ULSD will eventually replace the current on-highway diesel fuel, known as Low Sulfur Diesel (LSD), which
can have as much as 500 ppm sulfur content. ULSD is required for use in vehicles that will be equipped
with advanced emission control systems starting with the 2007 model year, and will be phased into use
between 2006 and 2010. Refiners and importers must ensure that at least 80 percent of the volume of on-
highway diesel fuel they produce or import is ULSD-compliant on June 1, 2006. Except in California, the
ULSD requirement for parties downstream of the refinery, up to and including fuel terminals that store
ULSD, takes effect on September 1; retail outlets must be compliant by October 15. In California, refiners
and importers must ensure that 80 percent of the on-highway diesel fuel they produce and import is
ULSD-compliant on June 1, 2006. However, 100 percent of the diesel sold in California must be ULSD
by July 15, downstream of the refinery, up to and including fuel terminals that store USLD; 100 percent
ULSD of the diesel offered for sale at retail outlets must be ULSD by September 1.
100 Years of Gasoline Retailing
It took two decades from Gottlieb Daimler's 1885 invention of what is generally recognized as the
prototype of the modern gas engine for the first gas station to open. In the ensuing century, there have
been a number of developments that have helped shape the petroleum marketing industry to what it is
today.

1905: In St. Louis, Automobile Gasoline Co., a subsidiary of Shell of California, opens what is believed to
be the first gas station in St. Louis in 1905. Some other accounts suggest that the first gas station was
opened by SOCAL in Seattle in 1907. At these early stations, shopkeepers would fill a five-gallon can
from behind the store and bring it to the customer's car to fill it.

1908: While there are already approximately 300,000 automobiles on the road, the introduction of the first
affordable Model T leads to a rapid growth in automobile sales within several years.

1911: The U.S. Supreme Court declares John D. Rockefeller's Standard Oil Trust to be an
"unreasonable" monopoly. The trust, which controlled much of the production, transport, refining and
marketing of petroleum products in the United States, is broken up into a number of distinct companies,
including:
     • Standard Oil of Ohio (Sohio), now part of BP
     • Standard Oil of Indiana (Stanolind), renamed Amoco, now part of BP
     • Standard Oil of New York (Socony), merged with Vacuum, renamed Mobil, now part of
        ExxonMobil
     • Standard Oil of New Jersey (Esso), renamed Exxon, now part of ExxonMobil
     • Standard Oil of California (Socal), renamed Chevron, now part of ChevronTexaco
     • Atlantic and Richfield, merged to form Atlantic Richfield (Arco), now part of BP (Atlantic
        operations were spun off and bought by Sunoco)
     • Standard Oil of Kentucky (Kyso) was acquired by Standard Oil of California, now part of
        ChevronTexaco
     • Continental Oil Company (Conoco) is now part of ConocoPhillips

1913: Gulf Refining Co. opens what is believed to be the nation's first drive-up service station on
December 1 in Pittsburgh. On its first day it sells 30 gallons of gasoline at 27 cents per gallon. This is also
the first architect-designed station and the first to distribute free road maps.

1916: The first canopy is introduced, as Standard Oil of Ohio unveils a prefabricated canopy prototype.

1927: The Southland Ice Company introduces the first convenience store in May in Dallas. "Uncle
Johnny" Jefferson Green, who ran the Southland Ice Dock in Oak Cliff, realized that customers
sometimes needed to buy things such as bread, milk and eggs after the local grocery stores were closed.
Unlike the local grocery stores, his store was already open 16 hours a day, seven days a week, so he
decided to stock a few of those staples in addition to items he was already offering.

Late 1920s: By the end of the decade, 24-hour service stations already are in operation, serving the
needs of, among others, the commercial trucking industry. The first 24-hour convenience store didn't
open until 1961.
1932: Congress enacts the first excise tax on gasoline on June 21, a one-cent-per-gallon tax, with the
proceeds going into the general fund. Since 1997, the federal tax on gasoline has been 18.4 cents per
gallon, with the bulk of revenues going to the highway account. Virtually every state already had its own
additional gasoline tax at this time; the first state gasoline taxes go back to the 1910s.

1947: Frank Ulrich opens the first modern self-serve gas station, at the corner of Jilson and Atlantic in Los
Angeles. (The 20-store Hoosier Petroleum Co. tried self-serve in 1930 but the state fire marshal stopped
it, calling it a fire hazard.) With the slogan "Save 5 cents, serve yourself, why pay more?" Ulrich's station
sells more than 500,000 gallons its first month. A number of other independent stations begin to offer self
serve, primarily in California, the Southwest and the Southeast, but the total number of stations offering
self serve remain less than 3,000 until the early 1970s. By 1973, self-serve was permitted in 42 states. In
addition, the 1973 energy crisis helped spur consumer demand for self-service, which is now available in
48 states. (New Jersey and Oregon still require full-service operations -- New Jersey's law was enacted in
1949; Oregon's in 1951.)

1950: Frank McNamara and Ralph Schneider introduce the concept of a credit card with their Diners Club
Card. In 1958, American Express and BankAmericard are introduced. Today, an estimated two-thirds of
all gasoline purchases at convenience stores are paid by plastic.

1960: OPEC – the Organization of Petroleum Exporting Countries – is founded by Iran, Iraq, Kuwait,
Saudi Arabia and Venezuela. The five founding members were later joined by Qatar (1961), Indonesia
(1962), Socialist Peoples Libyan Arab Jamahiriya (1962), United Arab Emirates (1967), Algeria (1969),
Nigeria (1971). Ecuador (1973-1992) and Gabon (1975-1994) also were OPEC members.

1973: The U.S. Environmental Protection Agency (EPA) issues regulations calling for the incremental
reduction of tetraethyl lead (TEL) in gasoline. TEL had helped reduce engine knock and spurred the way
for the development of high-power, high-compression engines. Starting with the 1975 model year, U.S.
automakers respond by equipping new cars with pollution-reducing catalytic converters designed to run
only on unleaded fuel.

1973: OPEC announces an oil embargo against countries (including the United States) that supported
Israel during the October 1973 Yom Kippur War. Arab nations cut production by 5 million barrels per day,
but increased production in other countries adds 1 million barrels of day back into the system. Still, the
net loss of 4 million barrels a day represents 7 percent of the free world production and causes oil prices
to shoot up from $3.01 to $11.65 per barrel by December. The combination of short supply and price
controls initiated by President Nixon to control inflation lead to the closing of thousands of stations. By
March 1974, the embargo ends and the shortage abates.

1974: A national speed limit of 55 miles per hour is enacted (some states are later permitted to increase
the limit to 65 MPH on rural interstates). Ten years later, Sammy Hagar's song, "I Can't Drive 55" is a hit.
In 1995, President Clinton signs a bill lifting federal control over speed limits. Today some states have
speed limits of as much as 75 MPH.

1976: The last major grassroots refinery in the United States is built in Garyville, Louisiana.

1977: The Strategic Petroleum Reserve, the world's largest supply of emergency crude oil, is established.
As of January 2006, it held approximately 684 million barrels of oil in underground salt caverns in Texas
and Louisiana.

1979-81: In February 1979, the revolution in Iran begins, and in November the U.S. Embassy in Iran is
stormed and hostages are taken. Midway through the year, Saudi Arabia cuts production and the price of
crude oil soars. The Iran/Iraq war also reduces production in both countries. The world price of crude oil
jumps from around $14 per barrel at the beginning of 1979 to more than $35 per barrel in January 1981
(approximately $80 in today's dollars, adjusted for inflation) before stabilizing. Gasoline prices peak in
March 1981 at $1.42 per gallon, which, adjusted for inflation, is about $3 per gallon.
1981: The U.S. Government responds to the oil crisis by removing price and allocation controls on the oil
industry. For the first time since the early 1970s, market forces replaced regulatory programs and
domestic crude oil prices were allowed to rise to a market-clearing level. Decontrol also set the stage for
the relaxation of export restrictions on petroleum products.

1986: Pay-at-the-pump is introduced, with dispensers featuring a built-in credit/debit card reader system.
Only 13 percent of convenience stores have the technology by 1994, but 80 percent of convenience
stores are using the technology by 2002. In 2004, Sheetz is the first to use touch-screen kiosks at the
pump where customers can also order in-store foodservice items that they pick up after fueling.

1988: Underground storage tank (UST) regulations are passed, requiring all operators to upgrade their
storage tank systems with spill-prevention and leak-detection equipment within a decade. While
convenience store owners invest millions of dollars to ensure that their underground storage tanks are
compliant with current regulations, many local, state and federal government owners and operators, as
well as some tribes and commercial fleets, continue to dispense fuel from non-compliant tanks.

1990: Congress passes the Clean Air Act Amendments of 1990, which contain six provisions to be
implemented by the U.S. Environmental Protection Agency (EPA) in stages between November 1, 1992,
and January 1, 2000. Among the provisions is one for the Reformulated Gasoline Program, requiring the
most polluted metropolitan areas, representing more than one-fifth of the nation's population, to sell a
reformulated gasoline; other areas may "opt in" to the program by applying to the EPA. This program
introduces into widespread use the additives MTBE and ethanol to satisfy the oxygen content
requirement.

1990-91: In August 1990, Iraq invades Kuwait. The United Nations approves an embargo on all crude oil
and products originating from either Iraq or Kuwait, creating concern over supply shortages that leads to a
run-up in crude oil prices. Within a month, the price of crude oil climbs from about $16 per barrel to more
than $28 per barrel. The price escalates to a high of about $36 per barrel in September 1990. The Gulf
War begins in January 1991, but by then oil prices had already stabilized.

Early 1990s: Hypermarkets selling fuel begin to make inroads in the United States as H-E-B is among
the stores selling fuel in the Southwest. Interestingly, the concept was first introduced to the United States
in the 1960s when a number of supermarket chains and retailers like Sears tried to sell fuel, but it did not
generate sufficient consumer interest. Wal-Mart is the largest hypermarket selling fuel, with about 1,100
locations offering fueling. Today there are more than 3,600 hypermarket stores selling fuel, representing
an estimated 8 percent of total U.S. gasoline sales.

1996: Wallis Companies, a convenience store chain based in Cuba, MO, serves as the test market for the
introduction of Speedpass. In tests, Speedpass reduced the average three- to four-minute fueling time by
30 seconds. Within five years, more than 5 million customers were considered regular Speedpass users
at Mobil or Exxon branded stations.

1999: Consolidation of the industry begins with the merger of British Petroleum and Amoco, and, later
that year, Exxon and Mobil. In 2001, Chevron and Texaco merged, and Conoco and Phillips merged in
2002.

2001: Terrorists strike the United States on September 11. The market reacts to a rapid decline in
demand for crude oil and petroleum products prompted by reduced air traffic. Crude oil prices drop from
nearly $28 per barrel on September 7 to $17.50 on November 15. Gasoline prices, likewise, drop from
$1.52 per gallon on September 10 to $1.06 December 17, with many areas of the country seeing gasoline
prices under $1.00 per gallon.

2002-03: A general strike in Venezuela beginning on Dec. 2, 2002, deprives the United States of a critical
source of imported crude oil and refined petroleum product for several months. (Venezuela supplied
approximately 8 percent of total U.S. petroleum products.) Crude oil prices increase from a pre-strike level
of $26.83 to a mid-February 2003 level of $35.50 per barrel. Domestic crude oil stocks drop to their
lowest level since October 1975. Meanwhile, gasoline prices increase from $1.36 the week the strike
begins to $1.73 by mid-March 2003.

2004: Crude oil prices hit a then-record high of more than $55 per barrel in October. High crude oil prices
throughout the year help lead to record prices at the pump, and gasoline prices peak at $2.06 weekly
national average on May 24.

2005: Gasoline prices experience a seasonal peak on April 11 when prices reach a then-record
$2.28/gallon. Gasoline prices fall for the next six weeks as oil prices drop. However, oil prices climb again
in May, and gasoline prices follow suit. Oil prices hit a record $70.85 per barrel on August 30 following
Hurricane Katrina, and retail gasoline prices also rise, peaking at a record $3.07 for the week of
September 5.
A cellular tower 50 miles
from his store was Chip
Lavigne’s connection to the
outside world in the days
after Hurricane Katrina. It’s
also where he discovered
how big the convenience
and petroleum retailing
industry’s heart is.

By Jeff Lenard                          SmallIndustry,

NACS BOARD MEMBER and
Lavigne Petroleum President Chip
Lavigne freely counts his blessings.
His only store, Blue Harbor Pointe
in Mandeville, Louisiana, was
potentially in the path of Hurri-
cane Katrina, but it emerged rela-
tively unscathed, save for the top
of his canopy, which lay scattered
in pieces.
   After visiting his store to assess
the damage the day after Katrina
struck, Lavigne felt he had been
spared. The feared floodwaters
from Lake Pontchartrain didn’t
                                                                                                            PHOTOGRAPH BY RAY LASKOWITZ




                                          Through the help of friends around the
come in from the south, and               corner – and around the country – Chip
                                          Lavigne, president of Mandeville, Louisi-
the high winds didn’t drop the
                                          ana-based Lavigne Petroleum, was able to
canopy on top of his building and         reopen within a week of Hurricane Katrina.

destroy it.

14     NACS MAGAZINE   JANUARY 2006                                                    WWW.NACSONLINE.COM
BigHearts
      JANUARY 2006   NACS MAGAZINE   15
                                                                                            emergency workers or those who
                                                                                            regularly patronized his neighborhood
                                                                                            store, could get fuel and other essential
                                                                                            items. However, he needed power and
                                                                                            was told that it could take a month and a
                                                                                            half until power would be restored in the
                                                                                            area. The Federal Emergency Manage-
                                                                                            ment Agency (FEMA) offered Lavigne a
                                                                                            large generator, with one condition: The
                                                                                            store must only serve FEMA workers.
                                                                                            Lavigne rejected the offer. He felt he
                                                                                            couldn’t abandon his regular customers,
                                                                                            who needed fuel for their generators and
                                                                                            vehicles. He noted, “They’ll (FEMA) be
                                                                                            long gone, but the people in the commu-
                                                                                            nity will still be here.”
                                                                                               All across the country, FEMA had put
                                                        Blue Harbor Pointe was spared       holds on nearly every industrial-sized
                                                        the feared floodwaters from         generator that Lavigne needed. But Lavi-
                                                        Lake Pontchartrain, but Katrina’s
                                                        fierce winds destroyed its canopy
                                                                                            gne had help from his friends. After trying
                                                        and knocked out power.              every possible lead, NACS Board member
                                                                                            Dave Carpenter, president and CEO of J.D.
                                                                                            Carpenter Companies Inc. (Des Moines,
                                                                                            Iowa), found that his contractors had
                                                                                            contacts with organizers of an outdoor
                                                                                            religious concert in South Dakota and that
                                                                                            12 industrial generators were available.
                                                                                               While Carpenter was determining how
                                                                                            to secure, service, transport and insure the
   In fact, he was literally overcome with                                                  generator, Lavigne faced new challenges.
emotion in surveying his facility, noting,                                                  He needed to conserve fuel for his drive
“In one day, thousands of people lost                                                       to the Dedham Spring cellular tower, and
their homes, their cars, their businesses,                                                  fuel for the 50-mile journey was in short
all of their worldly possessions, or even                                                   supply, even for those who sold it. He had
their lives. Man, I am very, very blessed.”                                                 to develop strategies to maximize his fuel
   Still, his store had no power and he          As soon as his BlackBerry became           and still communicate at the one opera-
no way to communicate with the out-           operational, the messages began to pour       tional cellular tower. “Here I am in the gas
side world, since landline phone service      in from fellow NACS Board members,            business, and I have to worry about my
throughout the area was interrupted           checking in on him or offering their          own car’s supply,” Lavigne thought.
and virtually all cell phone service was      assistance.                                      But, within days of the hurricane,
impossible because of inoperable cel-            “I’m a one-store operator, but I have      Lavigne was able to sell fuel. Jerry Leb-
lular towers.                                 friends from across the country who           bus, Shell’s wholesale representative for
   But Lavigne heard about one cellular       care. The feeling that gave me is hard        the region, generously loaned Lavigne a
tower that was working — about 50 miles       to describe,” says Lavigne. “The com-         small generator from one of the nearby
away near the Dedham Springs exit off         ments were all the same: ‘What can we         Shell stations. Though it meant that one
I-12. There, cars had lined the side of the   do to help?’”                                 of Shell’s two stations near the interstate
road to make cell phone calls or send text       Lavigne felt it was his duty to get his    had to shut down because it now had
messages; Lavigne set off to join them.       store running so that people, whether         no power, Lebbus felt that it was more

16      NACS MAGAZINE     JANUARY 2006                                                                            WWW.NACSONLINE.COM
important to allow Lavigne to open and         with a truckload of supplies that Carpen-              “As big as this industry is, it’s quite
serve his neighborhood customers. The          ter and his team purchased in town.                 small,” says Carpenter. “And it is made
generator was only able to power Lavigne’s        “The event really brought everyone               up of good people. If you get involved in
fuel pumps, but it was a start.                together, and it was amazing that people            NACS — not necessarily as a Board mem-
   As Lavigne prepared to open, custom-        wanted to help someone hundreds of                  ber but any involvement, such as a speaker
ers desperate for fuel noticed and began       miles away that they never met,” says               or volunteer at any level — you meet so
queuing up, forming a line that stretched      Carpenter.                                          many great people who can help — and
for two miles. Despite a record-setting           But Lavigne had his own, even bet-               want to help,” says Carpenter.
surge in wholesale gasoline prices across      ter news. “Hey, I think we’re going                    “It makes you feel good,” Carpenter
the country, Lavigne kept his prices at        to get power in a couple of days,” he               adds. “The same would be true if some-
pre-hurricane levels. While his canopy had     told Carpenter from his spot near the               thing happened to us and our stores. I
blown away, the price signs remained, and      operational cellular tower. The crews               have no doubt.”
he honored those now-outdated prices.          initially slated for restoring power in                With everything that he had been
   These customers were also treated to        still-submerged areas of New Orleans                through, the first chance that Lavigne
free bottled water, courtesy of the Red        were redirected to areas like Mandeville,           had to really thank many of his friends
Cross, which was passed out to those           allowing Lavigne to get power far sooner            came this November at the NACS SHOW
waiting in line by Lavigne’s son, along        than he anticipated.                                2005 in Las Vegas, Nevada.
with free popcorn. And, because his car           That Sunday, six days after the hurri-              “I feel like we went through some-
wash crew could not work without an            cane hit, Lavigne had power at his store,           thing together, and I feel much closer
operational car wash, Lavigne gave them        though it would take at least another               to people I already considered good
jobs cleaning car windshields, grills and      two weeks to get power restored at his              friends” says Lavigne. “Before this, when
even the bumpers.                              home — and the homes of many of                     I’d see them in a business setting we’d
   “They needed money and they needed          his employees. But he was not done in               shake hands. Now we hug.”
something to do,” says Lavigne. “And our       his search for generators — he bought
customers appreciated it.” He also hired       every small generator he could find at              Jeff Lenard is the NACS director of public affairs. He manages
suddenly unemployed local landscapers to       the local Lowe’s to give to those without           day-to-day aspects of the NACS “Dangerfield Project,” the
remove fallen trees and limbs, spread fresh    power at their homes. “I just wanted to             first proactive effort to solicit broad media coverage of the
mulch and plant flowers.                       make people’s lives as comfortable as               positive aspects of the convenience store industry. He can be
   “When we opened up, we looked like          possible,” says Lavigne.                            reached at (703) 518-4272 or jlenard@nacsonline.com.
we didn’t miss a beat,” says Lavigne.
“Our customers said they appreciated
our efforts. They were tired of seeing
depression.”
   “A whole group of people came
                                               ‘Small’ Gestures, Big Hearts
together,” says Lavigne. “People were will-    2006 NACS Supplier Board Chairman Ron Coppel, vice president of business development at
ing to do whatever they could do, and I        Eby-Brown (Naperville, Illinois), was also in touch with Chip Lavigne in the days following the
wanted to be part of that.”                    hurricane. Eby-Brown coordinated its own donation efforts from its Georgia facility, and Coppel
   A New York Times reporter taking care       participated in what he calls his own “small but heartfelt” effort with his local temple to deliver
of family business in the area told Lavigne    items to a relief center in Jackson, Mississippi.
that she’d never experienced anything like        Coppel and his wife, with the support of Eby-Brown, went to several department stores and lit-
visiting his newly reopened store in the       erally emptied the shelves in purchasing plush toys for kids. At one store, the clerk at the register
midst of the destruction.                      silently scanned the toys in their jammed shopping cart. After going through about a dozen items,
   And Dave Carpenter was about to send        the clerk looked up and asked the Coppels why they had purchased so many toys. After Coppel
Lavigne even more good news — the              explained, the clerk continued to silently scan the toys, but with a renewed purpose. Now visibly
generator Lavigne needed to fully open         moved, tears streamed down her cheeks as she continued to scan the items destined for children
was ready, and Carpenter had a team set        hundreds of miles away.
to take it on the 900-mile trip to Louisiana      “The hardships that everyone faced after Hurricane Katrina really puts everyday problems in
during the Labor Day weekend, along            perspective,” says Coppel.


                                                                                                             JANUARY 2006              NACS MAGAZINE               17
                                       TESTIMONY OF

                                       BILL DOUGLASS

        CHIEF EXECUTIVE OFFICER, DOUGLASS DISTRIBUTING COMPANY

                                       REPRESENTING

             THE NATIONAL ASSOCIATION OF CONVENIENCE STORES

                                              AND

     THE SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF AMERICA

                                      AT A HEARING OF

               THE HOUSE COMMITTEE ON ENERGY AND COMMERCE

                                               ON

     “HURRICANE KATRINA'S EFFECT ON GASOLINE SUPPLY AND PRICES"


                                       September 7, 2005


I.     Introduction

       Good afternoon, Mr. Chairman and members of the Committee.        My name is Bill

Douglass. I am Chief Executive Officer of Douglass Distributing Company, headquartered in

Sherman, Texas. My company operates 14 convenience stores and supplies gasoline and diesel

fuel to 165 retail locations throughout the Dallas-Fort Worth area.

       I appear before the Committee today representing the National Association of

Convenience Stores ("NACS") and the Society of Independent Gasoline Marketers of America

("SIGMA").




                                                                                        1
II.     The Associations

        NACS is an international trade association comprised of more than 2,200 retail member

companies operating more than 100,000 stores. The convenience store industry as a whole sold

142.1 billion gallons of motor fuel in 2004 and employs 1.4 million workers across the nation.

        SIGMA is an association of more than 240 independent motor fuel marketers operating in

all 50 states. Last year, SIGMA members sold more than 58 billion gallons of motor fuel,

representing more than 30 percent of all motor fuels sold in the United States in 2004. SIGMA

members supply more than 35,000 retail outlets across the nation and employ more than 350,000

workers nationwide.

        Together, NACS and SIGMA members sell approximately 80 percent of the motor fuel

retailed in the United States each year.

III.    Summary of Testimony

        Thank you for inviting me to testify before you today on the impact of Hurricane Katrina

on the nation's wholesale and retail motor fuel supply and prices. The past ten days have been

some of the most challenging in my thirty years as a motor fuel marketer and I welcome this

opportunity to share my personal experiences, and the experiences and impressions of other

NACS and SIGMA members with whom I have talked, with you.

        As an initial matter, I would like to express my personal sympathy, and the sympathy of

our entire industry, for the victims of Hurricane Katrina. Individually and collectively, our

industry shares the suffering of our fellow citizens and will do all in our power to alleviate this

suffering at the earliest possible date.

        My testimony will touch on three broad topics today. First, I will provide the committee

with as much information as I have available on the impact of Hurricane Katrina on gasoline



                                                                                                 2
supplies and prices. Specifically, I will share with you my personal experiences over the past ten

days and summarize, to the extent possible, the information I have received from my fellow

retailers.

        Second, I am here to respond to allegations that I, and my industry, have taken advantage

of this tragedy by "gouging" our customers by raising retail motor fuel prices. Such allegations

are personally offensive to me, and in general reflect a lack of understanding of the market

events that have led to the gasoline and diesel fuel price spikes of the last ten days. While it is

certainly possible that some "bad actors" have sought to exploit this crisis for personal gain, I can

assure you that their actions are not the actions of the vast majority of our industry.

        Third, my testimony contains recommendations to the committee on steps that should be

taken to lessen the likelihood that such supply disruptions and wholesale and retail price spikes

will occur in the future. Unfortunately, these recommendations are remarkably similar to the

steps NACS and SIGMA have been urging public policymakers to take for the last ten years.

While the enactment of the "Energy Policy Act of 2005" earlier this summer was a good first

step towards implementing some of these recommendations, much remains to be done.

IV.     Impact of Hurricane Katrina on Wholesale and Retail Gasoline Prices

        For much of the eastern two-thirds of the nation, the impact of Katrina on wholesale and

retail gasoline prices could not have been more immediate and profound. I will leave it to other

witnesses here today to discuss the impact Katrina had on crude oil production and imports,

crude oil movements from production to refineries, domestic refining capacity, and the

movement of finished gasoline and diesel fuel throughout the country via pipeline, barge, and

truck. That is not my area of expertise. Instead, I will concentrate my testimony on my personal




                                                                                                   3
experiences over the past ten days as a marketer in Texas, and on the experiences of fellow

marketers in other areas over the past ten days.

       It will be helpful for me to use several charts to graphically make these points. This first

chart (Chart 1) depicts the daily movements of wholesale prices in the Dallas/Fort Worth market

last week. This is the "rack," or wholesale price -- the price at which my suppliers are willing to

sell me, and other marketers, truckloads of 87 octane conventional gasoline. As you can see,

these wholesale prices increased daily, and dramatically, last week. On August 28th, before

Katrina struck, my wholesale gasoline cost was $2.36 per gallon including federal, state, and

local taxes. Early last week, as Katrina struck the Gulf Coast, these wholesale prices jumped an

average of over eleven cents per day, for a total increase between Monday, August 29th and

Friday, September 2nd of 44 cents per gallon.

       I must point out that I am a branded marketer -- the stations I own and supply fly the flag

of a major refiner. The wholesale prices in this chart reflect branded rack prices, not unbranded,

or independent, rack prices. During this same five day period, wholesale prices for these

unbranded stores rose 73 cents per gallon, or over 18 cents per day.

       This second chart (Chart 2) shows how my company reacted to these rack price increases

in terms of our retail outlet prices. As you can see, our retail prices in general rose by a similar,

and in some cases, lower amount than our wholesale costs. In short, my company reacted

primarily to changes in wholesale price increases when determining where to set our retail

prices. In some cases, because of competition from other retailers in our market area, we did not

pass the entire increase in rack prices through to retail. On these days, virtually every gallon we

sold from our stations resulted in no or negative profit margins for our company, once our

operating costs are taken into account.



                                                                                                   4
       My personal experience is similar to the experiences of other retailers across the nation.

NACS and SIGMA obtained rack pricing data from the Lundberg Survey, an independent report

on wholesale motor fuel prices, for several major metropolitan areas for the past two weeks.

This chart (Chart 3) provides a broader look at wholesale gasoline prices in the Dallas-Fort

Worth market last week.

       The next two charts (Charts 4 & 5) indicate that my experience in Texas was not unique.

Chart 4 summarizes the changes in rack pricing in each region of the country, broken down by

PADD. As you can see, wholesale prices were up significantly last week in all areas of the

country. Chart 5 provides a look at wholesale rack prices last week in five randomly chosen

cities -- Atlanta, Boston, Dallas/Fort Worth, Detroit and Philadelphia.        All of these cities

witnessed substantial increases in rack gasoline prices last week.

       I have used these charts to provide you with detailed evidence that Katrina had a

widespread impact on gasoline prices in much of the country over the past two weeks -- not just

in the areas devastated by the storm itself. Because crude production was reduced, refineries

crippled, and gasoline pipelines were taken out of service, gasoline supply shortages began to

occur, first in areas close to the areas hit by Katrina and rapidly moving outwards to areas of the

country served directly or indirectly by the production, refining and transportation hub of the

nation's Gulf Coast.

       These statistics confirm that retail gasoline price increases last week were justified by

movements in the wholesale cost of gasoline. While two months from now hindsight may

provide us with additional facts that will indicate that the markets could have responded to this

supply crisis differently, as we are going through this crisis, the fundamental laws of economics




                                                                                                 5
tend to apply forcefully -- if demand remains the same or increases and supply is reduced, prices

will rise. This is the situation we have experienced for the last ten days.

V.      Allegations of Price "Gouging"

        Last week, there were widespread media reports, and even some comments by

congressional leaders, of gasoline price "gouging" by gasoline marketers in the wake of Katrina.

I can not assure the committee that all of these reports are false or that isolated instances of

profiteering for personal gain in the midst of this crisis did not occur last week. I wish I could.

        However, I can tell you that such actions were not the norm in our industry. The vast

majority of gasoline marketers are fair and scrupulous businesses. As my testimony has shown, I

personally responded to wholesale price hikes in my area in setting my retail prices. I am not

aware of any credible instance in which retail price increases were not justified by the supply

crisis faced by a retailer.

        It is important for this committee to understand how I and other gasoline retailers

establish our retail prices in a market with escalating wholesale prices. Simply stated, I try to set

my prices on the basis of the replacement cost of the gallons I have at my outlets. This is an

important concept which may not be readily grasped. When wholesale prices are rising, and I

know that the next load of gasoline I purchase from my supplier will cost me substantially more

than my last load, my sales must generate sufficient cash for me to make that next purchase and

to pay my supplier.

        For example, assume the gasoline at one of my retail stations cost me $2.00 per gallon

yesterday. I know that the next gasoline truckload from my supplier, to be purchased tomorrow,

will cost me $2.25 per gallon. I will, if I can based on competition in my area, set a retail price at

my outlet today that will cover the higher price I will have to pay tomorrow. If I don't, I will be



                                                                                                      6
forced to borrow money from my company's banks to pay for tomorrow's gasoline. Such debt

only increases my cost of staying in business and adds to the upward pressure on retail gasoline

prices. It is a sound business practice for a retailer to price today on the replacement cost of

gasoline at the outlet, not the cost of product actually at the outlet.

        If instances of profiteering on this tragedy have occurred, federal and state officials have

ample legal recourse for dealing with those bad actors, including Section 5 of the Federal Trade

Commission Act. Such behavior must not be tolerated now or in the future in our industry or

any industry.

        However, just as such behavior must not be tolerated in our industry, neither should the

media or opinion leaders react to such anecdotal reports by issuing blanket indictments of all

motor fuel marketers. Such generalizations may make for good "sound bites," but they do not

reflect what is actually happening across the country and unfairly damage the reputations of

many companies that are struggling to meet the challenges of the current crisis.

        If the only thing you knew about my company was that I raised by retail gasoline prices

by over 50 cents per gallon last week, would you suspect that I was attempting to profit from this

crisis? Maybe. But based on the information I have given you today, I trust that you would

reach a different conclusion after you had investigated the facts. I urged this committee and your

colleagues to gather the facts on last week's gasoline supply and retail pricing situation before

reaching conclusions about my actions or the actions of other motor fuel marketers.

        As a final point with respect to retail pricing, I have one more chart to share with you

(Chart 6). This chart outlines the approximate gross revenues that several different parties in the

petroleum exploration, refining, and distribution system realize from each barrel of crude oil.

Simply stated:



                                                                                                  7
       •   In August 2003, the royalty owner of the crude oil received approximately $4 per barrel;
           in August 2005, the royalty owner received about $8 per barrel;

       •   In August 2003, the crude exploration and extraction company was receiving
           approximately $28 per barrel of oil; in August 2005, this company received about $67 per
           barrel;

       •   In August 2003, a refiner was receiving around $11 per barrel; in August 2005, this
           company received about $27 per barrel;

       •   In August 2003, a gasoline retailer was receiving approximately $6 per barrel; in 2005,
           that retailer still received about $6 per barrel; and,

       •   In August 2003, a credit card company was receiving approximately $1.50 per barrel; in
           2005, that company is receiving approximately $3 per barrel.1

Based on this information, I question whether it is appropriate to single retailers out for pricing

scrutiny.

VI.        Recommendations for the Future

           In 1996, Tom Robinson, a former president of SIGMA, offered the following testimony

before the Senate Energy Committee as part of a hearing on "Recent Increases in Gasoline

Prices."      "The federal and state governments regulate the gasoline refining and marketing

industry with little or no thought given to costs, distribution difficulties, or market efficiencies.

Congress must acknowledge that . . . the present course will lead to further market disruptions

and higher gasoline prices at the pump." Mr. Robinson made that statement over nine years ago.

           Last year, I testified on behalf of NACS and SIGMA at a subcommittee hearing of this

committee and stated:

           "Our nation's gasoline and diesel refining industry is shrinking at a time when
           consumer demand continues to rise. Unless we collectively change course,
           domestic refining capacity will be unable to keep pace with demand, gasoline and
           diesel fuel price spikes such as the one we have experienced this year will become
           the norm rather than the exception, and our nation will become more reliant on
           imports of gasoline and diesel fuel to meet increased consumer demand in the

1
    All information based on publicly available sources.

                                                                                                   8
       coming years. Congress has a choice, it can either pursue policies that will
       encourage the expansion of domestic refining capacity, or it can turn its gaze
       overseas for our nation's future gasoline and diesel fuel needs."


       Unfortunately, both Mr. Robinson's and my predictions have come true.              Domestic

refining capacity continues to shrink, wholesale and retail motor fuel price spikes have become

the norm rather than the exception, and more of our nation's gasoline needs are being met by

foreign sources. NACS and SIGMA assert that it is time to stop talking about these problems

and do something about them.

       In my opinion, the enactment of the "Energy Policy Act of 2005" (EPAct 2005) is a good

first step towards addressing these problems.       I commend you, Mr. Chairman, and your

colleagues for taking the lead in making this important legislation a reality after five long years.

Specifically, your provisions gave the Environmental Protection Agency the statutory authority

to waive certain gasoline and diesel fuel controls last week, providing the market with much

needed flexibility to move product between markets to mitigate supply disruptions. This is an

immediate example of the positive impact this energy bill had had on the market.

       There are other important provisions in the 2005 energy bill that will assist in expanding

domestic refining capacity and in mitigating gasoline supply dislocations and price spikes,

including:

   •   Repeal of the reformulated gasoline program's oxygenate mandate;

   •   Restrictions on creation of new "boutique fuels" which strain refining capacity and the
       distribution system;

   •   Authority for retailers to blend compliant RFGs for limited periods each summer; and,

   •   Federal tax incentives to encourage the expansion of domestic refining capacity.




                                                                                                  9
NACS and SIGMA urge this committee and this Congress to build on the progress made through

EPAct 2005 in the following ways:

   •   Assure prompt implementation of the EPAct 2005 provisions outlined above, including
       the joint Environmental Protection Agency and Department of Energy Study on
       increasing gasoline and diesel fuel supplies while protecting the environment;

   •   Streamline permitting and siting procedures for expanding existing domestic refining
       capacity and for the construction of new grassroots refineries;

   •   Adopt additional tax incentives to expand our domestic refining capacity, or a federal
       government-led effort to site and build three new 500,000 barrels per day refineries on
       federal lands to augment domestic production;

   •   Encourage increased price transparency and lower price volatility in the nation's gasoline
       futures markets by increasing the number of delivery points and product types under such
       contracts; and,

   •   Investigate the pricing policies of credit card companies, whose charges make up an ever-
       increasing portion of the price of gasoline at retail outlets, particularly when gasoline
       prices are high.

None of these recommendations will result in a substantial short-term increase in gasoline

supplies or retail price decreases. However, if we do not undertake these initiatives now, we will

be sure to repeat the experiences of the past two weeks in the future.

VII.   Conclusion

       Thank you for inviting me to testify today on this important topic. I would be pleased to

answer any questions my testimony may have raised.




                                                                                               10
11
                     Chart 1- Douglass Distributing Wholesale Price Experience
Price                    August 28 - September 2, 2005 (per gallon prices)1

    2.90

    2.80

    2.70

    2.60

    2.50

    2.40

    2.30                                           Rack
                                                   Price
    2.20

    2.10

    2.00
                     8/28                   8/29   8/30           8/31   9/1     9/2
1
    Rack price includes taxes and freight                  Date

                                                                                       12
                   Chart 2- Douglass Distributing Wholesale/Retail Price Experience
                           August 28 - September 2, 2005 (per gallon prices)1
    Price
      3.00
      2.90
      2.80
                                            Retail
      2.70                                  Price
      2.60
      2.50
      2.40
      2.30
      2.20                                   Rack
                                             Price
      2.10
      2.00
                       8/28                   8/29   8/30          8/31   9/1    9/2
1
    Rack price includes taxes and freight                   Date


                                                                                       13
                         Chart 3- Wholesale Price Experience for Dallas/Fort Worth
                            August 29 - September 2, 2005 (per gallon prices)1
    Price
    3.00
    2.90
    2.80
    2.70
    2.60
    2.50
    2.40
    2.30                                            Rack
    2.20                                            Price

    2.10
    2.00
                        8/29                        8/30    8/31    9/1              9/2
1
    Rack price does not include taxes and freight
                                                            Date


                                                                                           14
           CHART 4 - WHOLESALE PRICES INCREASES BY PADD
             AUGUST 26 - SEPTEMBER 2, 2005 (per gallon prices

PADD                        Close September 2, 2005   Change from August 26, 2005

PADD I (East Coast)
  Branded                              $2.5454                 +55.08 Cents
  Unbranded                            $2.7919                 +83.62 Cents
PADD II (Mid-West)
  Branded                              $2.7919                 +48.11 Cents
  Unbranded                            $2.7800                 +72.55 Cents
PADD III (Gulf Coast)
  Branded                              $2.4004                 +43.80 Cents
  Unbranded                            $2.7760                 +80.06 Cents
PADD IV (Rocky Mountains)
  Branded                              $2.4259                 +34.57 Cents
  Unbranded                            $2.4819                 +37.60 Cents
PADD V (West Coast)
  Branded                              $2.3551                 +21.95 Cents
  Unbranded                            $2.7038                 +48.25 Cents




                                                                              15
                Chart 6- Approximate Gross Revenue Received by
                 Different Parties in 2003 & 2005 ($ per barrel)
Party                       August 31, 2003 Revenue   August 31, 2005 Revenue

Royalty Owner                         $4.00                     $8.00


Crude Exploration and                $28.00                    $67.00
Extraction Company

Refiner                              $11.00                    $27.00


Retailer                              $6.00                     $6.00


Credit Card Company                   $1.50                     $3.00




                                                                                16
Hurricane Rita Also Impacted Markets
Somewhat lost in a review of 2005 was the continuing effect of Hurricane Rita on the petroleum industry.

The hurricane, which made landfall east of Houston on September 24, had the potential to devastate the
petroleum industry still reeling from Hurricane Katrina. Over half of the offshore oil and natural gas
production in the Gulf of Mexico was still shut down from Hurricane Katrina, a number of refineries were
still scrambling to resume operations and worse-case scenarios forecast gasoline prices well in excess of
$3 per gallon after Hurricane Rita made landfall.

Had Hurricane Rita made a direct hit on the refining centers of Galveston and Houston, more than 2
million barrels per day (roughly 12 percent of U.S. capacity) would have been devastated. The extended
area beyond Houston and Galveston is home to more than one quarter of the country’s refining capacity –
approximately 4.3 million barrels per day. Even before Rita made landfall, refineries, representing a
cumulative 2.9 million barrels of daily production, were temporarily shut down in anticipation of the storm.

Instead, the hurricane made landfall near Beaumont/Port Arthur, with seven refineries, accounting for 1.7
million barrels per day of refinery capacity (roughly 10 percent of U.S. refining capacity), directly in the
path of the storm. Combined with the 5 percent of refining capacity then still offline from Hurricane
Katrina, this meant that U.S. refining capacity was down as much as 15 percent at the end of September
2005. Additional capacity also was lost in Louisiana, including Citgo’s Lake Charles plant, which was last
completely shut down nearly 50 years ago – in 1957.

Higher petroleum inventories at the time Hurricane Rita struck helped temper supply issues. Gasoline,
distillate fuel and crude oil inventories were all at or above the average range for this time of year,
according to U.S. Energy Information Administration data.

However, refineries require a complicated process to restart and cannot simply be brought “online” by
flipping a switch. In most cases, it took upwards of two weeks to get shut down refineries back to 90
percent of capacity.

To restart operations following Rita, or any hurricane, for that matter, facility managers first have to return
to an area that faced a mandatory evacuation, and in some cases also deal with the loss of their homes
from storm damage. Even if the refinery sustains no damage from high winds, there still can be problems
with flooding. Other concerns are the availability of crude oil, electricity to run the plant – and the pipelines
that distribute refined product – and water used for cooling the process units.

The Beaumont/Port Arthur area refineries were damaged and in some cases flooded – it took 45 to 60
days to get them some of them back on-line. Hurricane Rita also took out the entire power grid in
Southeastern Texas, and much of the pipeline capacity had to rely on generators.

Similar to the days following Hurricane Katrina, there were many retailers who weathered the storm, and
many brought in generators to begin operating within hours of the storm’s landfall. Another untold story of
Rita was how far inland it went with Hurricane strength winds. It caused extensive damage from the coast
to 150 miles inland. Many of the communities caught in the path had no power for over 30 days.

With most grocery stores not reopening for days, and some cases weeks, after the storm, convenience
stores were the lifeline to many of these communities, whether for basic staples such as bread and milk,
or for gasoline.
  From Dollars in Cost to Cents in Profit
Retail Price
In 2005 gasoline prices averaged $2.27.




                                                                 Source: U.S. Energy Information Administration




Distribution & Marketing
Only 9.0 percent, or 20.5 cents per gallon, was attributable to “Distribution & Marketing.”
     Estimated costs (varies by retailer):
     4 cents – cost of pipelines/terminals
     3 cents – distribution to stores
     1 cent – inventory shrink
     4 cents – store operating expenses
     4 cents – credit card fees                                  Sources: U.S. Energy Information Administration,
     3 cents – amortization of equipment                                       NACS estimates




Retail Profit
After factoring in expenses, retailers are left with a few cents pretax profit, at best.
                   Gasoline Movements in 2004
                                       (000 b/d)
    17


    6
                            21

PADD V        PADD IV                  PADD II             2
                                                                        PADD I

         28                            21                       213          472
                                               373
                       30                                             17
                                                                             7
                                                        1,753
              58                  36

                                 PADD III


                                 110           Refineries Over 75,000 B/D
                                               Refineries Under 75,000 B/D
  NPRA 2006                            7
                                                                           U.S. Gasoline Requirements


             Washington                                                                     Minnesota
                                                                      North Dakota
                                                                                                                                                                                                         Maine
                                                   Montana
                                                                                                            Wisconsin
                                                                                                                                                                                           Vt.
             Oregon                                                   South Dakota                                                                                                               N.H.
                                                                                                                                  Michigan
                               Idaho                                                                                                                                        New York
                                                                                                                                                                                           Mass.
                                                 Wyoming                                          Iowa
                                                                                                                                                                                                  R.I.
                                                                           Nebraska                                                                               Pennsylvania                   Conn.
                                                                                                                Illinois                         Ohio
                                                                                                                              Indiana
                      Nevada                                                                                                                                                        N.J.
                                                                                                                                                                         Md.
                                                                                                                                                          W.Va.
                                                                                                                                                                                 Del.
                                       Utah                Colorado             Kansas
                                                                                                   Missouri                      Kentucky
                                                                                                                                                              Virginia


California
                                       Arizona                                                                             Tennessee                       North Carolina
                                                                                     Oklahoma
                                                                                                   Arkansas

                                                       New Mexico                                                                                       South Carolina

                                                                                                                                           Georgia
                                                                                                                           Alabama

                                                                             Texas                          Mississippi

                                                                                                                                       Florida


RFG - North                              N RFG w/Ethanol                                                 Louisiana

RFG - South                              S RFG w/Ethanol
Oxygenated Fuels                         NV CBG
                                                                                                                                                                                        ExxonMobil
CA CBG                                   7.2 RVP                                                                                                                                        As of January, 2006


RFG/CA CBG                               7.0 RVP
AZ CBG                                   7.8 RVP, MTBE-No Increase
Oxy Fuels/7.8 RVP                        7.8 RVP
                                                                                                                 This map is not intended to provide legal advice or to be used as guidance for state and/or federal
Oxy Fuels/7.0 RVP                        7.0 RVP, 30 ppm S                                                       fuel requirements, including but not limited to oxy fuel or RFG compliance requirements.
                                                                                                                 ExxonMobil makes no representations or warranties, express or otherwise, as to the accuracy or
Conventional                                                                                                     completeness of this map.

                                                                                                                                                                                        K.W. Gardner
                                                                                                                                                                                        R035622
Gasoline Theft at Convenience Stores (updated January 2006)
When gas prices increase, many gasoline retailers report an increase in gasoline theft, or "drive-offs."

Gasoline theft is at least a quarter-billion-dollars-a-year problem.

    •    Gasoline price volatility throughout 2005 led to a significant increase in gasoline theft, brought on by
         misdirected consumer anger at higher prices. While exact totals for 2005 have not been finalized, all
         estimates are that the figure will be significantly higher than in previous years.
    •    Nationwide, gasoline theft cost the industry an estimated $237 million in 2004. The average loss per store
         was $2,141 in 2004, and that figure is conservative, since it is based on all convenience stores that sell
         gasoline, including those in states that mandate full-serve (New Jersey and Oregon) and stores in areas
         where prepay in the norm, such as California and many major metropolitan areas including New York, Las
         Vegas, Chicago and Atlanta, for example. (Note: For 2003, gas theft was reported to be $112 million. While
         theft certainly increased in 2004, the difference in theft over the two years is also attributable to a more
         accurate measurement of the problem.)
    •    With convenience stores reporting total motor fuels sales of $262.6 billion in 2004, that means that, on
         average, one in every 1,100 fill-ups was gasoline theft. While this is not a "conga line" of theft, at a penny
         per gallon profit, a retailer would need to sell an extra 4,000 gallons to offset each $40 stolen.
    •    Gasoline theft tends to be a problem in densely populated metropolitan areas and near interstates where
         there's a greater anonymity; in these areas, retailers are reporting losses as much as $1,500 per store per
         month. At stores in communities, where everyone tends to know each other, the problem generally is not as
         significant.
    •    Gasoline theft is not a "Robin Hood" crime of robbing the rich -- retailers typically make pennies a gallon on
         the sale of gasoline. In fact, they can often make as much, or more, from the sale of a 12 oz. cup of coffee
         than a 12 gallon fill-up.
    •    The increase in gasoline theft is directly related to price increases, as opposed to high prices. Theft
         increases every time prices increase.

The profile of a typical gasoline thief has evolved.

    •    Typically, convenience stores can experience a few gasoline thefts a week; however, when prices increase,
         some stores see several gas thefts a day. With retailers making a penny or two profit on the sale of gasoline,
         a retailer needs to sell thousands of additional gallons of gasoline just to make up for the loss. Oftentimes, it
         only takes one $40 theft a day to significantly erode -- or wipe out -- a retailer's daily gasoline profits.
    •    Gasoline theft has always been an issue for the industry, and was often teenagers taking a few dollars of
         gasoline for a thrill. Today, the problem of theft is across all demographics, and the cars involved with the
         crime are everything from "junkers" to late-model SUVs.
    •    Just as the frequency of gasoline theft increases, so does the size of the fill-up stolen. And with higher
         prices, the amount lost from just one gasoline theft can top $70 when an SUV in involved.
    •    A disturbing trend of late is the emergence of gasoline theft rings, in which specially designed trucks are
         used to siphon fuel from stations' underground storage tanks. Members of a theft ring operating in Florida
         were arrested in June 2005 for using trucks that could siphon upwards of 1,000 gallons of fuel undetected.
         Also in June 2005, a man in Cottondale, AL, was severely burned in an explosion while allegedly trying to
         siphon hundreds of gallons of fuel from a station.

The problem of gasoline theft can be addressed by mandating prepay -- but it comes at a cost.
    •   Requiring customers to prepay for their fuel would virtually eliminate the problem of gasoline theft. However,
        consumers, wanting convenience, will usually choose to go to another retailer that does not require prepay if
        one is close.
    •   The town of Mt. Pleasant, SC (a suburb of Charleston), enacted an ordinance in early 2004 that mandates
        that all retailers require prepay. Similar laws have since been enacted in Twin Falls, ID (late 2004), Myrtle
        Beach, SC (July 2005) and Bowling Green, KY (January 2006). These are believed to be the only laws of
        their kind in the United States, although in some areas of the country prepay is the norm, especially
        California. Other areas of the country have looked at mandating prepay, including Conway, AR; Fayetteville,
        NC; and Milwaukee.
    •   Besides the risk of losing customers, retailers usually elect to require prepay as a last resort, since generally
        customers will underestimate their gasoline purchases because they don't want to have to go back in the
        store for change. Also, they tend to shop less inside the store, where margins are healthier, because they
        have already been inside the store once to prepay and find going back inside to be inconvenient. There also
        are concerns that mandating prepay could lead to cash customers instead paying by credit card at the
        pump to avoid the inconvenience of prepay. Since credit card fees are upwards of 3 percent, that means
        that retailers could incur an additional 9 cents per gallon in fees when gas is $3.00 per gallon.
    •   Usually, retailers will look at requiring prepay for certain pumps or certain hours before requiring it all the
        time at a store.

Gasoline theft makes a bad situation worse for retailers.

    •   Retailers are being hit hard by the higher gasoline prices. During periods of price increases, retailers'
        wholesale costs rise faster than they can recover them at the pump so profit margins are down significantly.
        NACS reports that gasoline margins in 2004 were 6.9 percent, the lowest level since 1984, and much of the
        reason for declining fuel margins is price volatility for gasoline.
    •   Gasoline theft usually hits retailers when the value of that stolen property is at an all-time high.
    •   In addition to reduced profit margins on gasoline, more customers pay for their gasoline by credit card
        (approximately 70 percent of gas customers for the first half of 2005, and approaching 80 percent by
        October 2005) when prices increase. The processing fees for credit cards (as much as 3 percent) further
        shrink already reduced margins to the point where retailers often make less per gallon than the credit card
        company.
    •   Higher gas prices contribute to lower in-store sales, where margins are more robust, because people have
        less disposable income. While customers may spend $40, that money is now all going toward gasoline, as
        opposed to the $40 paying for a fill-up and additional in-store items where margins are healthier.

Gasoline theft also negatively impacts consumers.

    •   Law-abiding customers must pay the cost of the theft in higher prices.
    •   Some drive-offs leave the gas island at unsafe speeds to avoid being caught, creating a more dangerous
        environment.
    •   An increase in the incidence of gasoline theft makes more retailers consider mandating prepay, which
        consumers do not prefer to have as their only option. If more areas mandate prepay, it will be one less
        product available to consumers on the "honor system" where they can obtain a product before they pay for
        it.

What do stores do to stop gasoline theft? They take immediate steps to deter it.

    •   They increase sales associate training so that store employees more effectively monitor what's happening at
        the gasoline islands.
    •   They also redouble efforts to greet all customers -- whether by intercom or in person -- at the gasoline
        island. This takes away the feeling of anonymity.
    •   If appropriate, they install cameras at stores so if people do steal, they will have it on tape and can work with
        law enforcement to prosecute thieves.
    •   They work closely with authorities to prosecute gas thieves.
    •   Like many retailers across the country, Tulsa, Oklahoma-based QuikTrip had tried to balance protecting the
        business from gasoline theft with protecting customer convenience. Its “PumpStart” program, introduced last
        year and now at its stores in Tulsa, Kansas City, Des Moines and Wichita, as well as select stores in Dallas,
        Atlanta and St. Louis, did just that. The first time a customer elects to pay for a gasoline purchase with cash,
        he or she has to go inside the store and present a driver’s license. After the driver’s license number is
        scanned or entered into QuikTrip’s system, a process that takes about 10 seconds, the customer is issued a
        PumpStart card that activates the pump. For subsequent cash purchases, customers can use the same card
        and avoid having to go inside the store to prepay. If they fill up and fail to pay, their account is canceled and
        their name is turned over to police. In Tulsa and Kansas City, gasoline theft was “reduced to a trickle,” the
        company reports.
    •   Altoona, PA-based Sheetz, Inc., is installing cash acceptors at its stores, eliminating the inconvenience of
        going inside the store to pay, and also eliminating the problem of gasoline theft, since customers must either
        prepay at the pump or use a credit card at the pump.




A number of state associations in the industry have been successful in gaining passage of legislation to
prosecute those committing gas theft.

    •   As of June 2005, 27 states passed laws in which a judge has the discretion to suspend the driver's license of
        someone convicted of gas theft. Missouri's law requires (making it mandatory, not permissive) that a judge
        suspend the driver's license of a person who pleads guilty to, or is convicted of, stealing fuel.
    •   Here are the states and the year the law took effect:
        1998: Georgia
        1999: Alabama, Florida, Mississippi
        2000: Kansas, South Carolina, Michigan, Tennessee, West Virginia
        2001: Arkansas, Indiana, Kentucky, Virginia, Washington, North Dakota, Louisiana, Missouri, Texas, North
        Carolina
        2002: Colorado, Pennsylvania
        2003: Maryland, Connecticut, Wisconsin, Ohio
        2005: Iowa, Minnesota
    •   In 2005, Oklahoma and Virginia increased the fine for those convicted of gasoline theft. Also in 2005, South
        Dakota passed a law (which took effect July 1) that makes the owner of the vehicle used by someone who
        drives off without paying for gas liable for the cost of the gasoline plus a service charge. If the fee isn't
        paid, a civil fine is assessed.
    •   Gas thieves are getting their driver's licenses suspended. According to the Indiana Bureau of Motor
        Vehicles, the state recorded 171 license suspensions for gasoline theft in 2002, 366 suspensions in 2003
        and 246 suspensions in the first half of 2004.
    •   An important part of Georgia's campaign, developed by the Georgia Association of Convenience Stores and
        Georgia Oilmen's Association, and many of the other states, included stickers on the gas dispensers that
        warned customers of the impact of gas theft. A typical message showed a state trooper holding someone's
        driver's license, accompanied by the message: "Pay for your gas or lose it!"
Motor Fuels Sales at Convenience Stores (updated July 2005)
Convenience stores sell the majority of gasoline purchased in the country -- an estimated three quarters of all fuel
sold in the United States in 2004. Of the 138,205 convenience stores in the United States, 110,895 sell motor fuels
(80 percent); 93 percent of new convenience stores have fueling operations. (Unless otherwise stated, all information
is from the 2005 NACS State of the Industry report.)


Industry information:

    •    In 2004, convenience stores sold $262.6 billion in motor fuels, a nearly four-fold increase from 10 years
         earlier. In 1994, convenience stores sold $70.6 billion in motor fuels.
    •    Motor fuels sales account for 66.5 percent of revenues in the convenience store industry. However, because
         of their extremely low profit margins, motor fuels accounted for only 27.5 percent of gross profit dollars.
    •    The bulk of a convenience store's motor fuels sales are gasoline -- 93.5 percent. The rest comes from diesel
         fuel (6.4 percent) and "other fuel" such as kerosene (0.1 percent).
    •    Unleaded regular gasoline accounted for four fifths of the gasoline sold at convenience stores (81.4 percent)
         in 2004, followed by mid-grade (10.9 percent) and premium (7.7 percent). Sales of mid-grade and premium
         have declined over the past few years as consumers have traded down octane levels in reaction to
         escalating gasoline prices. In 1998, when prices averaged $1.05 per gallon, regular gasoline accounted for
         69.8 percent of gasoline sales.
    •    Like previous years, 2004 saw extreme price volatility for motor fuels. Prices averaged $1.83 per gallon, a
         sharp increase from the average of $1.55 in 2003. While prices climbed, motor fuels profit margins
         continued to shrink. Gross margins in 2004 dropped one cent from the year prior, to 12.7 cents per gasoline.
         After incorporating expenses, such as credit cards fees, which can be as much as 3 percent, and taxes,
         profit margins in 2004 typically were one or two cents per gallons. On a percentage basis, margins in 2004
         were 6.9 percent, the lowest since 1984.
    •    Gasoline theft, or "drive-offs," in which customers fuel up without paying, cost the convenience store industry
         $237 million in 2003. Gasoline theft over the past few years has largely been tied to seasonal price
         increases. Drive-offs have increased most in metropolitan areas where there's greater anonymity. However,
         by July2005, 27 states have increased the penalties for gas theft, and more people are facing prosecution --
         and even license suspension.
    •    "Heavy" gas shoppers -- those who most frequently purchase gasoline, rate low gasoline prices as the most
         important criteria for where they purchase gasoline, followed by frequent purchaser cards and promotions.
         All other shoppers rate "convenient location" as the most significant factor in their motor fuels purchases
         (Source: NACS' 2000-2005 "Future Study").


Store averages:

    •    The average convenience store posted $2.37 million in motor fuels sales in 2004.
    •    More convenience stores are selling larger volumes of fuel. The average store sold 107,852 gallons per
         month, but more than one-third of stores (34.4 percent) sold more than 125,000 gallons per month. .
    •    The average convenience store had 8.5 fueling positions in 2004.
    •    New convenience stores in urban areas (populations 50,000 or greater) require an investment of $397,029
         for motor fuel equipment and $57,706 for motor fuel inventory. For rural stores, the figures are $274,582 and
         $39,100. For both types of stores, motor fuel equipment is roughly half of total equipment costs for stores.
Debit Holds for Fuels Purchases
(updated January 2006)
As gas prices and the use of plastic at the pump have increased, consumers are increasingly concerned about the
debit "holds" on their accounts.

Retailers only are responsible for the amount of the hold; card network rules require that they place holds,
and the bank issuing the debit/credit card is responsible for the length of the hold.

    •   Both Visa and MasterCard require that retailers place holds, or "preauthorizations," on debit and credit card
        gas purchases. Most consumers don't notice holds on their credit cards because they have sufficient credit
        lines that they don't exceed, even with holds.
    •   Holds are standard practice for any business that accepts plastic as a form of payment in a situation where
        the final dollar amount to be assessed is unknown in advance. Holds placed on gas purchases are similar to
        the preauthorizations that hotels do with a credit card when someone checks in.
    •   Most retailers today have a hold between $50 to $100 to approximate the cost of a fill-up. The amount of the
        hold has increased as gas prices have increased; $35 was previously a common amount.
    •   The hold amount is particularly important with PIN-based debit transactions. Retailers are liable for the full
        amount of the transaction, even if it is a valid one, if they accept a transaction amount higher than the hold
        amount (known as "Reason Code 96").
    •   Under all normal circumstances, it's not the retailer who is responsible for continuing the hold, since
        credit/debit card network rules make it impossible for the retailer to extend the hold.
    •   Retailers have nothing to gain from holding on to consumers' money – it freezes accounts that could be
        used to spend money in the store. Further, retailers do not benefit from fees incurred from overdrafts that
        happen as a result of unanticipated holds.

PIN-debit transactions are real-time and holds should be released immediately; signature-based debit
transactions have longer hold times that could take several days to clear.

    •   For signature-based debit transactions (such as using a check card as a credit card), holds, like the holds on
        credit cards that can affect someone's spending limit, can remain for 48-72 hours, since the processing
        times are slower. Generally, they should last a shorter period of time. Retailers conduct "batch" transactions
        at least daily; any time that the hold lasts beyond that time for signature-based debit is due to bank
        settlement processes.
    •   For PIN-based debit transactions, which are real-time, online transactions, the hold should last minutes.
        When consumers swipe their cards and the pump says "authorizing," that is when the hold is being charged
        to the customer's account. After the fill-up is complete, the issuing bank is automatically notified, and the
        hold amount should immediately change to the amount that the customer actually purchased.

Customers on tight budgets can make choices about what is best for them.

    •   If you want the hold to be released immediately, pay inside where you can use your PIN, since PIN debit
         transactions should be registered immediately. An increasing number of stations – an estimated 60 percent
        – also have PIN pads at the pump.
    •   Consumers should ask their banks what is the policy is regarding the length of debit holds. If the hold lasts
        longer than a few minutes for PIN-based transactions, or longer than three days for signature-based debit
        transactions, customers need to discuss the matter with their banks to learn why the holds are lasting so
        long. Most banks print their phone numbers on the backs of their cards.
    •   When posed with the option of credit or debit, consumers should always choose the PIN debit option
        because that transaction will be immediate, whereas a credit or signature-based debit transaction can take
        days. Plus, PIN-based debit is much more secure for the customer.
    •   Also check online bank statements regularly and call the bank if when something looks out of the ordinary
        on a statement.

More consumers are choosing to pay for their gas with plastic.

    •   The overall increase in average annual gas prices from 2003 to 2004 (from $1.55 to $1.83 per gallon) led to
        a significant increase in the use of plastic at the pump, with 54 percent of all gasoline customers paying with
        plastic in 2004. The huge increase in gasoline prices in 2005 has accelerated that trend, and NACS
        estimates that 70 percent of all motor fuels purchases for the first half of 2005 were by plastic, and that
        figure approached 80 percent by October 2005.
    •   For the first time in 2003, Americans made more in-store payments electronically than they did with cash or
        checks, according to a Dove Consulting/American Bankers Association study — 52 percent of all purchases
        were made with debit and credit cards.
    •   American consumers purchased $872 billion in goods with debit cards and $1.75 trillion with credit cards in
        2005, according to the Nilson Report.
    •   Consumers 18 to 24 years old now use plastic to pay for more than half of their purchases (50.4 percent),
        according to Visa.
Credit Card Fees a Growing Challenge for Convenience Stores (updated July
2005)
While convenience stores were able to rein in most of their expenses in 2004, a significant expense continued to
grow: credit/debit card fees. For stores selling motor fuels and accepting plastic, these fees in 2004 equaled roughly
85 percent of a store's profits, and are expected to grow in the coming years.

Credit card fees are high — and growing.

    •    For convenience stores, credit/debit card fees, as a percent of gross profit, now equal 6.1 percent of gross
         profit dollars. For stores that sell motor fuels and accept plastic, these fees cost the stores an average of
         $30,996 in 2004, a figure approaching the average per-store pretax profit of $36,095. On an industry-wide
         basis, the total cost of credit/debit fees was $3.3 billion.
    •    Credit-card fees are the third-largest expense at the store level. NACS estimates that card fees are
         projected approximate the cost of store rent by 2020.
    •    Particularly with the rising cost of gasoline and the higher transactions at the pump, retailers are seeing the
         impact of credit-card transaction fees. The overall increase in average annual gas prices from 2003 to 2004
         (from $1.55 to $1.83 per gallon) led to a significant increase in the use of credit cards at the pump, with 54
         percent of all gasoline customers paying with plastic in 2004. The huge increase in gasoline prices in 2005
         has accelerated that trend, and NACS estimates that 70 percent of all motor fuels purchases are now paid
         with plastic.
    •    With razor-thin margins for retailers selling motor fuels, the credit card associations often make more profit
         on a gallon of gasoline than the retailer selling the gasoline.
    •    For the first time in 2003, Americans made more in-store payments electronically than they did with cash or
         checks, according to a Dove Consulting/American Bankers Association study — 52 percent of all purchases
         were made with debit and credit cards.

Credit card fees cost a typical convenience store 3 percent of the transaction, which is made up us several
components, some of which can be costlier for convenience stores than other channels.

    •    The largest component of credit card fees — interchange — accounts for roughly two-thirds of the fees
         charged to convenience stores. Many convenience stores are charged higher interchange rates set by the
         card associations whose members are card-issuing banks. Each type of card carries different fees that
         reflect factors like fraud rates, risk factors, transaction volume and processing path. American Express and
         Discover also set interchange rates, but operate as independent entities as opposed to the association
         approach that governs Visa and MasterCard and their respective member banks.
    •    There is a considerable difference between the fees charged for a PIN-based debit transaction and a credit
         transaction. Convenience stores, which generate approximately two-thirds of their sales volume from motor
         fuels, tend to be charged a higher rate than that other retail channels because they are not as easily able to
         steer pay-at-the-pump customers to choose debit and enter a PIN as other retailers. As a result, many debit
         purchases, which should carry the lower rates, are processed as credit and carry higher costs to
         convenience store retailers.
    •    The other major component of credit card fees is acquiring fees; credit card companies have increased their
         acquiring fees, such as authorization, capture and settlement fees, charged to retailers over the past few
         years — even though the per-unit processing costs have declined.
    •    Another concern for convenience store retailers is that they are often hit twice for fees from the same
         customer visit – once when the customer pays at the pump, and once when he or she pays inside the store,
         if that is also a credit/debit card transaction.
Solutions — regulatory and otherwise — need to be found to reduce these credit card fees before they
become even more burdensome.

    •   NACS is working with dozens of retailers — representing more than 2,000 stores — regarding their
        participation in a new money-saving credit-card processing program. NACS, in partnership with First Data
        Corporation, introduced the new program designed to reduce card-processing fees for convenience store
        and petroleum marketers in October 2003. This "interchange plus" program allows retailers to choose
        between a card processor that charges a percentage of the sale versus one that charges cents per
        transaction. An advantage of the cents-per transaction approach is that as the dollar value of the transaction
        grows (such as with the rising price of gasoline), the card processing fees remains the same.
    •   In April 2003, Wal-Mart and thousands of other retailers won a class-action lawsuit against Visa and
        MasterCard that claimed that the credit-card companies, individually, and in conspiracy with their member
        banks, violated the federal antitrust laws by forcing merchants who accept Visa and/or MasterCard-branded
        credit cards for payment also to accept Visa and/or MasterCard-branded debit cards for payment, and by
        conspiring and attempting to monopolize a market for general-purpose point-of-sale debit cards. Retailers
        said that these actions caused merchants to pay excessive fees for credit and debit transactions. As a
        result, the card companies settled the case and agreed to pay back damages, temporarily reduce fees and
        establish clear and distinct visual as well as electronic markers for identifying a credit from a debit card
        carrying a Visa or MasterCard logo.
    •   A greater use of PIN-based debit cards — which customers prefer for convenience and greater security —
        could also help reduce fees — as long as retailers are rewarded by the lower interchange for these more-
        secure transaction methods. With PIN-based debit cards accounting for only 5 percent of total cashless
        sales, and 60 percent of all pay-at-the-pump dispensers already equipped with PIN pads, the potential to
        increase debit sales is enormous if we can educate consumers on the benefits. By 2007, PIN debit cards will
        be used for 45.1 percent of all POS payments and will actually exceed POS credit card payments, according
        to Financial Insights.
    •   NACS is a founding member of the Merchants Payments Coalition, a group made up of trade associations
        representing retailers, restaurants, supermarkets, drug stores, convenience stores, gas stations, on-line
        merchants and other businesses that accept credit and debit cards and are concerned about the increasing
        interchange fees charged by banks and credit card companies to process credit and debit transactions.
Hypermarkets Entering Petroleum Marketing (updated January 2006)
"Hypermarkets" -- the term collectively refers to the group of mass retailers that includes supermarkets, discount
retailers, and warehouse clubs -- are increasingly entering the market to sell motor fuels.

The emergence of hypermarkets into petroleum marketing continues a trend of "channel blur."

    •    A growing number of retailers are now selling motor fuels to entice consumers with "one-stop shopping of
         gasoline and in-store items. As of July 2005, 3,860 hypermarket store sites sold motor fuels (compared to
         the 110,000-plus convenience stores that do), but that figure continues to grow. Hypermarkets
         comprise approximately 2-3 percent of the motor fuels retailing outlets, but capture 7.7 percent of total fuels
         sales, compared to the approximately 75 percent sold by convenience stores (Source: Energy Analysts
         International).
    •    Traditional lines of retailing are blurring. Drug stores market themselves as convenience stores;
         convenience stores have embraced new services to maximize one-stop shopping opportunities, such as
         foodservice, car care, and banking; and larger retailers like hypermarkets are adding gasoline retailing and
         even convenience stores on their properties.
    •    Most of the hypermarkets selling fuels are supermarket chains (2,042 stores), followed by discount chains
         (1,044 stores) and mass merchandise/club chains (764 stores). However, because of their massive volume
         of motor fuels sales, mass merchandisers/club chains outsell all other hypermarket formats, averaging
         445,00-plus gallons per store per month, well ahead of the approximately 298,000 gallons per month per
         sold overall by hypermarkets and the 108,000 gallon per month per store at convenience stores (Source:
         Energy Analysts International).
    •    The rate of hypermarket growth is significant in the grocery channel. Of all new stores planned in 2004, 62
         percent included fueling, an increase from the 18 percwent just one year earlier (Source: Food Marketing
         Institute).
    •    Wal-Mart has approximatley 1,300 gasoline retaling sites inclusive of Wal-Mart sites (Optima, Murphy and
         Mirastar), Neighborhood Stores and Sam's Clubs (Source: Energy Analysts International).
    •    The growth of hypermarkets is a phenomenon that began in the early 1990s in select markets like West
         Texas, but really became evident in the late 1990s. In 1997, they commanded 0.3 percent of the motor fuels
         market; by 2000, that market share had grown 10-fold to 3.0 percent. Only two years later, that figure nearly
         doubled, with hypermarkets enjoying 5.9 percent market share in 2002 (Source: Energy Analysts
         International).
    •    Interestingly, some supermarkets chains, and other retailers including Sears, experimented selling fuel in the
         1960s and 1970s, but the idea failed to generate sufficient consumer interest.

Hypermarkets are looking to use motor fuels retailing to find new profit centers.

    •    The addition of fueling on site allows additional sales on the property, which might have been underutilized
         parking spaces. In addition, since they don't need to acquire additional real estate to sell motor fuels, the
         investment may be viewed as marginal.
    •    Hypermarkets are hoping that motor fuels sales can lure more customers into their stores by offering
         discounted motor fuels prices, particularly upon opening fueling facilities.
    •    By 2008, hypermarkets are expected to sell 12.6 to 15.4 percent of the motor fuels purchased in the United
         States (Source: Energy Analysts International).

Convenience stores are still the dominant retailer in petroleum marketing, and are working to enhance their
offer to customers.
    •   Convenience stores sell approximately three-quarters of the gasoline purchased in the U.S. -- more than
        $262 billion in motor fuels sales in 2004. The remainder of the motor fuels sold in the U.S. are through
        hypermarkets, service stations without convenience store operations, and "kiosk" operations, which are
        typically small convenience operations with a very limited product selection and limited customer access.

    •   In addition to convenient locations and longer hours, and easy in-and-out access, convenience stores have
        one other significant advantage with customers -- their smaller size makes it easier for customers to see
        regular faces working there. The average convenience store employs 10 people to operate the store in a
        given week; that's usually a fraction of the labor at a hypermarket in a given shift.

Market conditions in the U.S. are not as favorable to hypermarkets as they are in other countries.

    •   Metropolitan areas, with real estate at a premium, should see less market penetration by hypermarkets,
        since they already have smaller, congested parking lots.
    •   Hypermarkets have the lowest market penetration in the Northeast, while it is approaching saturation level is
        the Gulf Coast area and seeing rapid expansion in the West and Rockies. NPD Group reportsthat
        hypermarkets have more than 20 percent market shares in Denver, Houston and Seattle-Tacoma.
    •   Retailers located near highways may be less affected, since travelers are most concerned with easy access
        to fuel.
    •   While more than half of the motor fuels in France is purchased at hypermarkets (52 percent market share in
        1999 according to Datamonitor), and more than one-fifth of fuels in the United Kingdom is purchased at
        hypermarkets (21 percent of fuel sales in 2001 according to Datamonitor), the evolution pattern is much
        different in the U.S. where a convenience store or gas station has been on nearly every corner for decades.
    •   Retail gasoline margins in the U.S. are already slim -- and less than in Europe -- and are lower than
        hypermarkets experience in their stores. Consequently, multi-national hypermarkets entering the U.S.
        gasoline market in a significant way will experience an erosion in their overall profit margins.
    •   Compared to Europe, gasoline is much cheaper in the U.S., and there's less of an opportunity for mass
        merchandisers to undercut on price. While hypermarkets are luring customers on the promise of cheaper
        prices, they can only reduce them so much, since approximately 90 percent of the cost of a gallon of gas is
        determined (through taxes, wholesale prices, refining costs, and distribution costs) before it even arrives at
        the retailer.
    •   Eventually, hypermarkets must allocate all costs, including overhead and real estate costs or their returns to
        shareholders will suffer.

Ultimately, the customer will determine which retail outlet best meets his/her needs.

    •   The typical shopping radius for convenience stores is 2-6 miles; the typical shopping radius for a
        hypermarket is 20-40 miles. It remains to be seen if gasoline customers will regularly drive out of their way to
        fill up at a hypermarket, or if they will purchase gas as part of their planned visit to a hypermarket.
    •   Time is at a premium in today's society, and many potential customers may not find value in traveling
        considerable distances, waiting in line, or have limited options for related services or payment options to
        save on gas prices.
    •   NACS' 2000-2005 "Future Study," using customer data collected by PriceWaterhouseCoopers, found that
        consumers still rate a convenient location as the number-one factor in determining where to buy gas. That is
        closely followed by low prices, and then much further back are high-quality gasoline, the ability to pay at the
        pump, and the ability to have a fast transaction.
    •   Consumers define "convenience" differently at hypermarkets, where they define it as one-stop shopping, as
        opposed to the easy access and speed offered at convenience stores
Gasoline Myths... and Facts
Updated August 2005
Any time consumers face higher gasoline prices, conspiracy theories and urban legends are sure to follow and
proliferate, especially via e-mail. Here are a few of the more common myths – and the actual facts -- about gasoline –
with the debunking courtesy of the popular site that examines urban legends, Snopes.com.

Myth: Infected needles are being placed on the underside of gas pump handles.
Sample copy: "My name is Captain Abraham Sands of the Jacksonville, Florida Police Department. I have been
asked by state and local authorities to write this email in order to get the word out to car drivers of a very dangerous
prank that is occurring in numerous states.... Some person or persons have been affixing hypodermic needles to the
underside of gas pump handles. These needles appear to be infected with HIV positive blood. In the Jacksonville
area alone there have been 17 cases of people being stuck by these needles over the past five months. We have
verified reports of at least 12 others in various states around the country..."

Facts:

• There is no Capt. Sands, for starters.
• The hoax, which has been around since 2000, does not contain any truth to it.

Details at: http://www.snopes.com/horrors/mayhem/gaspump.asp

Myth: Boycotting a couple of gasoline brands will bring overall gas prices down
Sample copy: "GAS WAR! Join the resistance!!!! I hear we are going to hit close to $3.00 a gallon by the summer.
Want gasoline prices to come down? We need to take some intelligent, united action…"It then urges: "Here! 's the
idea: For the rest of this year, DON'T purchase ANY gasoline from the two biggest companies … If they are not
selling any gas, they will be inclined to reduce their prices. If they reduce their prices, the other companies will have
to follow suit."

Facts:

    •    Companies can't alter the basics of supply and demand: prices go up when people buy more of a product,
         and they go down when people buy less of a product.
    •    A boycott of specific brands wouldn't result in lower overall prices: Prices at all the non-boycotted outlets
         would probably rise due to the temporarily limited supply and increased demand, and would actually make
         the original prices look cheap by comparison.
    •    The only practical way for consumers to help bring about a decrease in gasoline prices is by decreasing
         demand by buying less gasoline, not just shifting where it's bought.

Details at http://www.snopes.com/inboxer/petition/gasout.htm.

Myth: Participating in a one-day 'gas out' will help bring the retail price of gasoline down
Sample copy: "It has been calculated that if everyone in the United States did not purchase a drop of gasoline for one
day and all at the same time, the oil companies would choke on their stockpiles.

At the same time it would hit the entire industry with a net loss of over 4.6 billion dollars which affects the bottom lines
of the oil companies.

Therefore May 19th has been formally declared 'stick it up their behinds day' and the people of this nation should not
buy a single drop of gasoline that day."
Facts:

    •    By definition, a boycott involves the doing without of something. What the "gas out" calls for isn't consumers
         swearing off using or buying gasoline, even for a short time, but for them to simply shift their purchases by
         one day.
    •    Gasoline is a fungible, global commodity, its price subject to the ordinary forces of supply and demand. No
         amount of consumer gimmickry and showmanship will lower its price in the long run; only a significant,
         continuous reduction in demand will accomplish that goal.
    •    Moreover, the primary effect of the type of boycott proposed in the "gas out" messages is to hurt those at the
         very end of the oil-to-gasoline chain, service station operators — the people who have the least influence in
         setting gasoline prices and survive on the thinnest of profit margins. As such, the "gas out" is a punch on the
         nose delivered to the wrong person.

Details at http://www.snopes.com/politics/business/nogas.asp

Myth: Spurning gasoline from certain major oil companies will cut off the funding of terrorists
Sample copy: "Nothing is more frustrating to me than the feeling that every time I fill-up the tank, I am sending my
money to people who are trying to kill me, my family, and my friends. It turns out that some oil companies import a lot
of middle eastern oil and others do not import any. I thought it might be interesting for Americans to know which oil
companies are the best to buy their gas from."

Facts:

    •    The idea that oil companies sell gasoline only through their branded service stations is wrong. Oil
         companies sell their output through a variety of outlets other than their branded stations; as well, by the time
         crude oil gets from the ground into our gasoline tanks, there's no telling exactly where it came from.
    •    Complex problems rarely lend themselves to simple, painless answers. Simply shifting where we gasoline is
         purchased isn't nearly as good a solution as curtailing the amount of gasoline bought.

Details at: http://www.snopes.com/inboxer/outrage/nogas.htm

Myth: Cellular phones have touched off explosions at gas stations
Sample copy: "In case you do not know, there was an incident where a driver suffered burns and his car severely
damaged when gasoline vapors ignited an explosion while he was talking on his mobile phone standing near the
attendant who was pumping the gas. All the electronic devices in gas stations are protected with explosive
containment devices, (intrinsically safe) while cell phones are not. READ YOUR HANDBOOK!"

Facts:

    •    The Cellular Telecommunications Industry Association has said, "There is no evidence whatsoever that a
         wireless phone has ever caused ignition or explosion at a station anywhere in the world. Wireless phones
         don't cause gas stations to blow up."
    •    The American Petroleum Institute notes, "We can find no evidence of someone using a cell phone causing
         any kind of accident, no matter how small, at a gas station anywhere in the world."
    •    In fact, creating an fire from a cell has not been demonstrated experimentally that it's even possible – which
         a 2004 broadcast of The Discovery Channel's Mythbusters program confirmed.
    •    It is unlikely that cell phone batteries could ignite gasoline fumes, given that they are the same voltage as
         automobile batteries (12V D.C.) but deliver far less current. Likewise, cellular phone "ringers" do not produce
         electricity -- they produce audio tones that simulate the sound of a ringing telephone.

Details at http://www.snopes.com/autos/hazards/gasvapor.asp

Static electricity is the cause of an increase in gas station refueling fires
Sample copy: "Bob Renkes of Petroleum Equipment Institute is working on a campaign to try and make people aware
of fires as a result of "static" at gas pumps. His company has researched 150 cases of these fires. His results were
very surprising…"
Facts:

While the complete e-mail has numerous errors, many parts of this are accurate.

    •    The Petroleum Equipment Institute did study the issue and released a report that noted: "Americans pump
         gasoline into their cars between 16 and 18 billion times a year generally without incident," but fires related to
         refueling at gas stations seem to be on the rise, and many of these fires are apparently not the result of the
         usual causes: open flames (mostly from cigarette smokers), sparks from the engine compartments of
         automobiles (primarily from drivers refueling cars with their motors running), or a lack of electrical continuity
         between nozzles and grounded dispensers."
    •    The PEI states that they "don't have any definitive answers" about the reasons for this increase, but notes
         that the refueler became charged prior to or during the refueling process through friction between clothing
         and the car seat to such an extent that electrostatic discharges to the vehicle body, fuel cap or dispensing
         nozzle occurred, and this often happens in cool, dry weather.
    •    Another potential causes for the increase in fires is improper handling and filling gas cans.

Here are generally recommended tips for safe refueling:

    •    Stay near your vehicle's fueling point when using a self-serve station.
    •    Do not go back into your vehicle when refueling, regardless of whether you use the nozzle's hold-open latch.
    •    If you must re-enter your vehicle while refueling, discharge the static electricity by touching a metal part of
         the outside of your car away from the filling point before touching and removing the gas nozzle.
    •    Always turn your engine off before refueling.
    •    Never smoke, light matches or use a lighter while refueling.
    •    To avoid spills, do not overfill or top off your gas tank.
    •    Let the fuel dispenser shut off automatically and leave the nozzle in the tank opening for six to eight seconds
         so the gasoline in the tank neck can settle down and any remaining gas in the nozzle can drip out of it into
         the tank.
    •    When filling a portable container always place it on the ground, and don't move away from it until you're
         through and the cap is back in place.

Details at http://www.pei.org/static/ and http://www.snopes.com/autos/hazards/static.asp
Online Resources on Gasoline Prices
There are a number of excellent online sources for data and information on the petroleum markets. Here are a
few of them:

U.S. Energy Information Administration (www.eia.doe.gov)
   •   Basic Petroleum Statistics (http://www.eia.doe.gov/neic/quickfacts/quickoil.html)
       Topline statistics for industry data, as well as links for detailed information.

   •   Petroleum Information at a Glance
       (http://www.eia.doe.gov/oil_gas/petroleum/info_glance/petroleum.html)
       A starting point to access information including EIA data from as far back as 1949 and reports looking
       as far forward as 2025.

   •   Gasoline and Diesel Fuel Update (http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp)
       EIA's weekly report on gasoline and diesel fuel prices provides current weekly prices by region, as well
       as compared to the week and year prior. The site also includes a percentage breakdown of "What We
       Pay for in a Gallon of Regular Gasoline," using the agency's latest monthly data.

   •   This Week in Petroleum (http://tonto.eia.doe.gov/oog/info/twip/twip.asp)
       Typically released every Wednesday afternoon, this report analyzes the week's supply and demand
       numbers and factors that could impact them.

   •   Forecasts & Analyses (http://www.eia.doe.gov/oiaf/forecasting.html)
       Analyses and projections of energy information, including EIA’s Short-Term Energy Outlook and
       Annual Energy Outlook.

   •   State Energy Page (http://www.eia.doe.gov/emeu/states/_states.html)
       Overviews of each state's energy resources, and detailed information on state-specific supply and
       demand, fuel requirements and petroleum infrastructure.

   •   Oil Market Basics
       (http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/default.htm)
       From the wellhead to the gas tank, this primer explains how oil markets operate, from with hotlinks to
       oil price and volume data.

   •   A Primer on Gasoline Prices
       (http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/primer_on_gasoline_prices/html/petbro.html)
       EIA's MVP (most valuable publication) explains the components of the cost of gasoline, why gasoline
       markets fluctuate and why gasoline prices differ regionally.

   •   Gasoline Price Pass-through
       (http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2003/gasolinepass/gasolinepass.htm)
       Why do retail prices seemingly jump suddenly? EIA examined the movement of gasoline prices over
       time and found that most of the movement in retail prices (on a national and regional basis) is
       predetermined by previous movements in spot prices.
   •   Hurricane Impacts on the U.S. Oil and Natural Gas Markets
       (http://tonto.eia.doe.gov/oog/special/eia1_katrina.html)
       EIA’s final report on the impacts of Hurricanes Katrina and Rita. (last updated Dec. 27, 2005)

NACS (www.nacsonline.com)
   •   Hurricane Katrina: The Impact on the Retail Gasoline Market (published September 2005)
       (http://www.nacsonline.com/NACS/Resource/PRToolkit/Campaigns/Cover_HurricaneKatrina_Gasoline.htm)

   •   Gasoline Prices: The Impact of World, Local Events (published February 2005)
       (http://www.nacsonline.com/NACS/Resource/PRToolkit/Campaigns/Cover_GasPriceImpact_2005.htm)

   •   Gasoline Price Volatility in 2004: What's Going On? (published February 2004)
       (http://www.nacsonline.com/NACS/Resource/PRToolkit/Campaigns/Cover_GasPriceVolatility_2004.htm)

   •   NACS' Motor Fuels Supply Fungibility and Market Volatility Analysis (published September 2003)
       (http://www.nacsonline.com/NACS/Resource/PRToolkit/Campaigns/Cover_BoutiqueFuels.htm)

   •   Gasoline Prices: What Impacts Them? (published March 2003)
       (http://www.nacsonline.com/NACS/Resource/PRToolkit/Campaigns/Cover_GasPrices.htm)

   •   Motor Fuels Supply and Price Volatility (published September 2002)
       (http://www.nacsonline.com/NACS/Resource/PRToolkit/Campaigns/Cover_MotorFuels.htm)

American Petroleum Institute (api-ec.api.org)
   •   State-by-State Breakdown of Fuel Taxes (PDF)
       (http://api-ec.api.org/filelibrary/ACF13E.pdf)
       The latest combined federal and state motor fuel tax rates as of January 1, 2006.

   •   Media Center (http://api-ec.api.org/media/)
       A collection of facts, figures and other energy-related material intended for the media.

Department of Energy (www.energy.gov)
   •   Energy Price & Trends (http://www.energy.gov/pricestrends/index.htm)
       Provides information and historical data for energy sectors.

   •   Strategic Petroleum Reserve (http://www.fe.doe.gov/programs/reserves/spr/spr-facts.html)
       Information about the U.S. Government complex of four sites created in deep underground salt
       caverns that hold emergency supplies of crude oil.

Association of Oil Pipe Lines (www.aopl.org)
   •   Home page (http://www.aopl.org/go/site/888/)
       Pipelines move nearly two-thirds of the ton-miles of oil transported annually.

   •   Pipeline 101 (http://www.pipeline101.com/Introduction/)
       Basic information compiled from industry, government and research experts and published materials.

AAA (www.fuelgaugereport.com)
   •   Daily Fuel Gauge Report (http://www.fuelgaugereport.com/sbsavg.asp)
       Provides daily averages for fuel by grade for each state.

Minerals Management Service (http://www.mms.gov/)
   •   Gulf of Mexico Outer Continental Shelf (OCS) Region (http://www.gomr.mms.gov/index.html)
       Provides an overview of Gulf Coast offshore operations.
Contact Information for Reporters/Feedback Reporters:
If you’d like to speak to someone at NACS about issues related to gasoline prices,
contact Jeff Lenard, NACS director of communications, at (703) 518-4272, e-mail
jlenard@nacsonline.com, or John Eichberger, NACS vice president of government
relations, at (703) 518-4247, e-mail jeichberger@nacsonline.com.


Retailers:
How are you coping with today's higher gas prices? What resources do you need?
Which resources did you find most helpful in this kit or from other sources? What issue
has the media covered best in discussing the issue of higher gas prices? Please take a
moment to provide your feedback to help us address your ongoing needs related to
motor fuels issues.
Feedback >>

				
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