What’s ‘shrink,’ you ask? Microwave me a S’more, and I’ll explain.
By Taylor Hudson
We like data and believe there is never enough of it. (Read more on the power of data here.) Most of the time we’re talking about price data, but in liquid refined fuels we’re also talking about volume and temperature data. To understand why, you need to use your imagination.
Have you ever made S’mores by putting your graham cracker, chocolate, and marshmallow in the microwave? If so, you’re on your way to understanding the field of liquid-refined product molecular expansion and contraction. Congratulations! This is also known as “shrink.”
What’s shrink, you ask? Let’s use our trusty S’more to explain. When the marshmallow gets hot in the microwave, it quickly begins to look like a softball, right? The molecules get hot (temperature) and expand (volume). When you stop the microwave, the marshmallow shrinks in size as it cools down. Now imagine a molecule of diesel fuel, heating oil, gasoline, or other liquid refined product. Guess what? When they get hot, they expand too, spinning the meter more. When they get cold they shrink, reducing in volume, spinning the meter less.
You heard it here first. One of the most important concepts related to liquid refined product pricing is a variation on S’mores in the microwave. “Shrink” or temperature adjustment generally refers to the process of comparing price offers when the temperatures of the fuels are different. You may be surprised to learn that fuel temperature is changing all the time, even at the same terminal fed by the same storage tank. Outside temperatures, piping configuration between storage tanks and truck loading racks, time of day, more fuel arriving into the terminal… each of these factors can swing fuel temperature throughout the day and over time, sometimes dramatically. That means that knowing fuel temperature is critical to comparing prices and finding the best deal. The good news? Temperature adjustment data is readily available on every terminal bill of lading. The bill of lading shows the fuel’s temperature, gravity, and the load’s gross as well as net volumes. Yes, these variables are data points worth capturing to improve your team’s procurement process.
Gross volume is the metered amount of fuel loaded, regardless of the fuel’s temperature. The gross volume doesn’t reflect if the molecules spinning the meter were hot and plumpy, or cold and shriveled.
Net volume does reflect fuel temperature and is referenced to compensate for temperature’s impact on volume. Why? Well, think about the marshmallow again. If you bought that big tasty dessert right after the microwave treatment, but didn’t sit down to eat until later that night, wouldn’t you be upset at finding your marshmallow small and shrunken? Of course you would! Same with fuel, it shrinks when the temperature falls.
So what’s the standard? A long time ago a bunch of smart people we don’t know got together and settled on 60 degrees Fahrenheit as the temperature standard for a lot of the liquid refined fuels we buy and sell each day. They figured out the math and equations necessary to calculate a fuel’s net gallon amount, assuming its temperature was 60 degrees, regardless of its actual temperature, as shown on the bill of lading. Thanks to that standardization, buyers and sellers could negotiate prices, and value inventory, no matter what the fuel’s temperature. Genius!
So why should we care?
Well, if I offered to sell you a gallon of hot fuel at $3.00 or a gallon of cold fuel at $3.05, which one is the smarter buy? You won’t know unless you calculate the amount of volume offered at the same 60-degree temperature, or the price per net gallon. If you run the math, the cold fuel at $3.05 turns out to be the better buy than the hot fuel at $3.00. Bingo!
This is one more example of the power of data to eliminate the “fluff” factor from pricing. Now go enjoy that S’more!
