AAFES gas prices hit the ‘floor’
November 23, 2008
During one week in July, when fuel prices were at their worst, 10 gallons of the cheapest gas at Army and Air Force Exchange Service pumps in Europe cost a little more than $43. Today, that same gas — unleaded regular in Germany — costs a bit more than $25.
It’s a drastic decline, one that has for the most part followed the unprecedented nosedive taken by stateside prices penny for penny.
Just days after the U.S. Energy Information Administration posted a weekly update showing average U.S. prices fell by more than 15 cents a gallon in the previous week, AAFES announced Thursday that its prices in Germany, which are usually based on the EIA average, would fall just a fraction of a cent.
The reason, according to a news release from exchange officials, is that prices are at "floor" — another way of saying the price is at, or at least close to, cost.
An AAFES’ policy says the exchange can’t lose money on fuel sales, and floor pricing is intended to ensure that it doesn’t.
Still, with oil and fuel prices coming down around the globe to lows not seen in years, why are "floor" prices happening now?
In Germany, it’s the combination of the exchange’s fuel contract with Esso and rapidly dropping U.S. prices. Under the contract, Esso changes the price it charges AAFES for fuel once a month. The price AAFES charges customers, meanwhile, changes weekly.
So when U.S. prices dive quickly, as they have been, AAFES could lose money on fuel sales were prices not at "floor," according to the exchange. However, when prices quickly rise, as they did in the summer, there’s no mechanism to limit AAFES’ profits on fuel.
Neither AAFES nor Esso will disclose how much the exchange pays for fuel to avoid harming Esso’s "commercial interests."
What it charges is a closely guarded secret. "Well, that is what our competitors want to know, too," said Gabriele Radke, an Esso spokesperson in Germany, when asked Thursday what Esso charges AAFES.
Nevertheless, with prices at floor, it is possible to estimate how much AAFES is paying Esso for a gallon of fuel in Germany.
According to the exchange, the average cost of dispensing fuel in the country is 26.9 cents a gallon — or at least it was.
AAFES adjusts its dispensing cost once a year based on how much it cost to get gas from the supplier to customers’ tanks over the previous year. The last such adjustment happened in May.
Assuming it still costs AAFES roughly 26.9 cents a gallon to dispense fuel, under floor pricing, AAFES should be paying roughly $2.26 per gallon for regular unleaded in Germany.
Under the exchange’s standard price formula — adding local dispensing costs to the average U.S. price and lopping off 6 cents for the average stateside dispensing costs — regular in Germany would now cost AAFES customers $2.281 per gallon, were it not for floor pricing. That’s about 2 cents more per gallon than AAFES is supposedly paying for the gas, not including the costs of getting it into customers’ tanks. After paying the dispensing cost, AAFES would lose about 25 cents a gallon.
In Turkey and the Azores, where prices are also at "floor," the exchange would lose more than $2.50 a gallon if it based its prices on stateside averages. That’s because fuel contracts in those countries are handled by the Defense Energy Support Center. Prices under those contracts have changed just twice in the past year, and AAFES is now paying $4.71 for premium in the Azores, and $4.71 in Turkey.
Before DESC contract prices changed July 1, AAFES was making more than 80 cents a gallon on gas in Turkey and the Azores.
Stripes staffer Marcus Klöckner contributed to this report.