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Originally published March 7, 2011 at 7:50 PM | Page modified March 8, 2011 at 5:12 PM

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Gas pricing: It's about more than just oil

When Jay Ricker, owner of the BP filling station off Interstate 70 in Plainfield, Ind., set the price of unleaded gasoline at $3.44 per gallon on March 1, it was 4 cents higher than three days earlier.

The Associated Press

Ups, downsat the pump

THE AVERAGE PRICE of regular in Seattle for this week in March since 2007:

2011

$3.64

2010

$2.94

2009

$2.16

2008

$3.48

2007

$2.58

Source: eia.gov

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When Jay Ricker, owner of the BP filling station off Interstate 70 in Plainfield, Ind., set the price of unleaded gasoline at $3.44 per gallon on March 1, it was 4 cents higher than three days earlier.

That alone might have been irritating to drivers paying the highest gas prices in more than two years. It was even more so because it happened on a day when the price of crude oil fell almost $1 a barrel.

"It's up 20 cents one day, down 10 cents the next day," said Oscar Elmore, a courier who was filling up his Ford Taurus at a service station in Dallas recently. "It sounds kinda fishy to me."

Gas prices rise when oil prices rise, and fall when oil prices fall — except when they don't. What you pay depends on an array of factors, from what happens on an exchange in New York to what the competition is charging.

Gas reached a national average of $3.51 a gallon Monday. That's up 14 cents, or 4 percent, over the past week. The average soared 20 cents, the steepest increase since September 2008, two weeks ago.

The price Monday was even higher in Seattle: $3.64, up 12 cents in a week and 36 cents over the past month, according to the U.S. Energy Information Administration.

A year ago, the national average was $2.75. The current price is the highest it's ever been this time of year, and analysts expect it to climb higher in coming weeks.

Unlike an iPhone or a pair of jeans or a Big Mac, oil and gas are commodities, and their prices can change every second at the New York Mercantile Exchange and other trading hubs. Those far-off changes affect the cost of the next day's commute.

Like station owners and refineries, sellers of commodities price their product based not on what it costs to produce it but on what it costs to replace it. Stations such as the Plainfield BP, which receives shipments of gas several times a week, must adjust prices constantly to keep up with the changing costs of shipments.

Oil is the biggest factor in gas prices, accounting for 50 to 70 percent of the cost. Recent upheaval in the Middle East and strong demand for oil around the world have pushed oil prices past $100 a barrel for only the second time in history.

But the price of a gallon of gas at the pump rises — and, yes, falls — for several other reasons.

Oil prices can be moved by geopolitics, the value of the dollar, extreme weather or Chinese demand. Gas prices can be moved further by oil prices or refinery problems.

Gas prices are expected to rise even further in coming weeks as refiners switch to a more expensive blend of gasoline designed to help protect against evaporation during the warmer summer months.

"We have to pay whatever the market says we do. It's an instantaneous world," said Joe Petrowski, CEO of Gulf Oil, a big gasoline wholesaler.

Whether the gas at the Plainfield BP was made from a barrel of oil pumped a month ago 1,000 miles away in Williston, N.D., or three months ago and 7,000 miles away in Kuwait, its price is set by buyers and sellers in New York hours before Ricker buys it.

There's no way to know exactly where the oil used to make the gasoline sold at the Plainfield BP originated, or even where the gas was refined. Oils from many sources are mixed on their way to a refinery, and gasolines from many refineries are mixed on their way to a fuel terminal, where gas is stored before trucks transport it to stations.

But here's a plausible route: Oil is pumped by a company operating in Texas or Louisiana and piped to a major oil hub in Cushing, Okla. From there, it is sold to an energy trader who may store it or trade it a few times.

BP then buys it to feed its Whiting, Ind., refinery. After a two-week pipeline trip to Whiting, the oil is "cooked" into gasoline and piped to BP's fuel terminal in Indianapolis.

There, BP blends it with ethanol and a few special BP-branded additives and sets a final wholesale price, known as the rack price. It's this rack price that leads to the final pump price for most station owners.

A wholesaler such as BP or Gulf each has a formula for setting the rack price. In an attempt to smooth out spikes and dips of the market, a wholesaler usually buys some fuel through long-term contracts. The rest is bought on the so-called spot market, priced at a given moment by a benchmark such as the New York Harbor gasoline price.

Every day at 5 p.m., BP tells Ricker what the rack price will be starting at 6 p.m. That price is good for 24 hours.

Ricker hires a trucker to go to the terminal, fill 'er up with 10,000 gallons and bring it to his station. Ricker then decides what price to charge customers based on his ultimate concerns: the Speedway and the Circle K that share an intersection with him.

Most station owners make a profit of two or three pennies per gallon. What Ricker really wants is to attract customers to sell the truly precious liquids: the water and soda and coffee inside.

Three times a day, station manager Debbie Sennett enters competitors' prices into a computer. The software spits out a price that will match or undercut the competition. When the competition lowered prices last Tuesday, so did Ricker, to $3.24 per gallon.

"Gasoline is the only product in this country that if you're a penny different people will go out of their way to go somewhere else," Ricker said.

Wholesale gasoline prices have risen 38 cents per gallon, or 15 percent, since the first uprising in Libya on Feb. 15. When wholesale gas prices rise quickly, filling-station owners are squeezed or even lose money because competition prevents them from increasing retail prices as quickly as costs are rising.

So if it seems that station owners take their time lowering prices when oil and wholesale gas becomes cheaper, it's because that's exactly what they do.

"If gasoline prices drop a dime, a station will only pass along one or two pennies a day," said Patrick DeHaan, an analyst at GasBuddy.com, a website that collects and publishes retail gas prices. "They are slower to pass along the discount because they need to make up for money they lost when prices went up."

Associated Press reporters Sandy Shore, Tom Murphy and David Koenig and Seattle Times staff contributed to this report.

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