Costco Gas Price Flap Cooling Down

You can probably still find the fine-print disclaimer on high-bulk low-density dry foods, like cereals and potato chips: “This package is sold by weight, not by volume. You can be assured of proper weight even though some settling of contents normally occurs during shipment and handling.”

Not true with liquid fuels: gasoline is sold by volume , not by weight. Like most liquids, gasoline expands with temperature. This wasn’t a big deal when gas was 25 cents a gallon. Not only is the cost of gas going up again, the energy you get out of a gallon of gasoline decreases as the temperature rises. You may soon be able to read the fine print while filling up at the gas station.

I read in azcentral.com (the online Arizona Republic, article Costco to change how it sells gas) that Costco Wholesale has agreed in court to install new gasoline pumps in 14 southern and southwestern states. The agreement calls for temperature-adjusted retail fuel sales in areas where wholesale delivery is temperature adjusted.

Initially, I thought this smelled like another misguided and overblown consumer effort. Gasoline has always been sold by the US Gallon – hasn’t it? In an era when “Enron entities”, the financial sector and poor industrial planning have brought our economy to its knees, are we forcing Costco to micromanage gasoline metering by climate and temperature zones?

I don’t think so now. I researched this, and the math is easy to do. I found an excellent plain-language staff report (the Kucinich Report, US House of Representatives, 2007) which explains the coefficient of expansion metrics and also reports that the industry has long factored temperature compensation into its wholesale delivery pricing structures.

Below is the comment I posted on azcentral.

“I was curious how much of an effect this really all has. The coefficient of expansion is about 0.069 percent per degree F. In an area like Phoenix, this works out to a 3.5% expansion for a 50 degree rise over 60F. This could be $1.05 on a $30 sale, so it IS significant. The Kucinich report says the industry DOES adjust for temperature in wholesale transactions, so they should do the same for retail. On the other hand, it might be a waste of time in Northern CA. In Alaska, I bet extra low temps are already factored into the retail price. Nationwide, the Kucinick staff calculated the premium for hot weather retail gas sales in 2007 was $1.5 billion. So cudos to CostCo for footing the expense of doing the right thing.”

Do The Math

If a gallon is always a gallon, what’s this really all about? We’ve never had to consider the effect of temperature on the amount of energy we can pump into our gas tanks, but the airline industry always has. A Boing 767 has a maximum fuel capacity of 23,980 U.S. gallons. Pilots routinely have to factor in how far that avgas will actually take us when it cools down (and shrinks in volume)  to -30F.

For the rest of us, it’s enough to know that a gallon of gas in Phoenix at 110F is only 0.96 gallons when it cools down to 60F. The spreadsheet below shows an imaginary tank-topping scenario on a drive from Northern California to Phoenix. For this comparison, assume price and gallons pumped  is constant everywhere, so the pump will always state it delivered 13.701 gal (which is true until you adjust for temperature):

True cost per gallon at various temperatures

What about Chevron, Shell, Arco, Union 76 et al? The suit named nine major gasoline retailers in the U.S. Since it turns out that wholesale deliveries in hot-climate areas have already been priced, in effect, by weight, not by volume, it seems only fair that other major retailers suck it up and follow suit.

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