Price Intersection
It appears that petroleum diesel is about to cross the 3.50 a gallon mark. Unbelievable.
It wasn’t very long ago that we were buying fuel from Iowa, and selling it to Coop members for 3.50 a gallon. At the time petroleum diesel was 1.59 at the pump.
We were about twice the money, and we have always been inconvenient, and you had to be a Coop member to buy fuel.
On that model we built the B100 Community Trail which has long provided fuel to a narrow and intense fringe group of consumers. Different owners of trail assets have come and gone and today the major stakeholders operating the trail include us, Carolina Biodiesel, and the folks at Cape Fear Biofuels.
The Coop operates its own location in Moncure, and Industrial operates the locations in Pittsboro, Carrboro, Raleigh, and Burlington-if we can ever get the damn thing open.
Along the way the Coop has grown to over five hundred members, some of whom make their own fuel at the Coop, and the majority of which pull fuel from the Trail. I’m guessing we meet the fuel needs of around three hundred Triangle families-and we are in the midst of a new Fuel Consumption Survey which will give us new information.
Some people just buy memberships because it is “cool,” and don’t run around on biodiesel at all. And sometimes, on our sliding scale consulting business, we ask people to buy a membership to get their questions answered. A lot of them live far away from North Carolina.
All of which is merely background fodder to the real question at hand, and that is, what will happen to us, and to our 3.50 fuel when petroleum is 3.60 on the street.
As John succinctly put it on a recent BIG list post, “Don’t the laws of supply and demand apply to Pittsboro?”
It’s complicated. But I think he is right when he says we need to tackle this question, so here it goes:
Traditionally our Coop members have been driven by different levers, none of which has been price. We are populated by clean air connoisseurs, peaceniks who like the fact that there is “No War Required” to get biodiesel, fans of Made in America, societal collapse aficionados, and a host of others who all have their reasons to run around on B100, or high percentage blends.
We do have fans of cheap fuel-those are the folks who brew their own. But when the price on the street exceeds the price on the Trail, I believe we will be awash with “cheap fuel lovers” who will sign up based exclusively out of an abiding love for their wallets.
Stand by for membership explosion. I believe that is what will happen to the Coop, and I think that is a good thing, since healthy membership equals healthy Coop. I should note that the Coop is a “C” corporation, that is jointly owned by the membership. If we have 510 members, that equals 510 shareholders, each with one vote.
I should also point out that the Coop is very close to producing its own on-spec fuel which they will be able to sell for onroad use. I believe they are on the cusp of becoming the smallest commercial producer in the land. When that happens, their fuel will no longer come from Industrial, and presumably the sale price of the fuel will be set by the Board of Directors and Matt and Greg-the folks who make the fuel and who manage the various revenue streams at the Coop.
All of which is merely a long introduction to the question of what will Industrial do about price at the locations it operates. Carolina Biodiesel, the Coop, and Cape Fear have long been buying bulk fuel at wholesale pricing and have subsequently been free to charge whatever they wish.
But back to “Supply and Demand.”
Today our three Trail locations represent less than 10% of our business. Last month the number was 7%.
A small percentage of Industrial’s business ships out in the form of blends, and the rest ships out in bulk to oil companies, who then blend and deliver to bus lines, and airports, and municipal fleets, and gas stations. We sometimes ship to other biodiesel plants which are running short of product.
For simplification sake, let’s divide our fuel business into two parts: The Trail, where fuel has sold or 3.50 a gallon for years, and the Terminal, which tends to mirror the price of wholesale petroleum.
Fuel that ships to the Trail typically goes out on our tank truck, and gets dropped at various locations. The locations tend to be capital intensive, high maintenance and transaction heavy. It tends to be a bunch of 14 gallon fills, sometimes having to birddog down inaccurate credit card info, or membership info, etc.
And while there is no doubt that fuel sold for 3.50 a gallon has a higher gross margin than fuel sold through the terminal, I doubt it has ever been a profitable undertaking.
That said, we would have no objection to seeing the Trail move from 10% of our business to 100% of our business. I’m not sure how many members that would take-but I am guessing around 2000 or so.
The fact is that we could happily pump ten times the product through the Trail, and stay at 3.50 a gallon, and merely drive our gross margin up.
We believe in the Trail. We’ve invested heavily in the Trail. One of the main reasons it fails to make money is that it does not represent significant volume. A tank and dispenser costs the same for a location that pumps 2,000 gallons a month, or 20,000 gallons a month.
All of which is to say that it is not quite as simple as Supply and Demand. I actually think it would be spectacular to see every drop we churn out go directly into the fuel tanks of Coop members. And I think there is a very real possibility that we could do that, without increasing price.
Which is merely a long winded way to say, “We’ll see.” The last time we had a price intersection with petroleum was after Katrina hit. We had a terminal full of fuel, gas stations were shuddered, and petroleum diesel hit 3.59 in Pittsboro. We held the line at 3.50, and had a very big sales month.
Unlike Katrina, I don’t believe this price of petroleum is headed back down…
Original post by Lyle