Experts, Owners of Convenience Stores and Gas Stations Give Some Context on Why Retail Gas Prices Are What They Are
When gasoline goes from a large underground tank into a person’s car, whether the price per gallon is high or low, many dangerous and costly steps have been taken up to this final stop.
Petroleum goes from ancient dead plants buried underground to highly refined 87-octane regular unleaded gasoline. In that transition, there is a battery of regulations, taxes, and inspections. These are international, national, state, county, and local (and sometimes, even township or borough laws).
That last stop, the gas station, is a common part of American life. And economics. And, apparently, politics.
But what determines the price of gasoline? There’s some good information to be gleaned from policy people and economists. However, literal hands-on experience is less common in the news. The narrative has less input from experts who have run gas stations. This article explores some of their knowledge and experience.
Shabbir Hossain, MBA runs gasstationbusiness101.com. Sal Risalvato is a former gas station owner and former Executive Director of the New Jersey Gasoline/C-Store & Automotive Association.
From what they say, the small business owner of the Circle K down the street has a whole lot to plan and track between (and during) customers. They’re also taking some serious chances.
First, some context.
Stops Along the Way: The Many Steps from Ancient Buried Plant Matter to the Gas Tank
As indicated, a lot of things, necessary or not, come between acquiring oil and powering an engine for someone driving to work.
All this probing, prodding, and processing are not free. The cost of all these policies, with accompanying fees and taxation, is mostly passed onto the consumer. However, the last link in this chain before it gets into someone’s internal-combustion-engine vehicle is the gas station.
The further a sale or process is from fossil fuel being pulled out of the ground, the less profit. That rule of proximity is why nations with large geographical underground deposits — Saudi Arabia, Venezuela, Russia, and even parts of the US — all have (or had or could have) great oil wealth. As such, the gas station owner at the end of the line is not “raking it in.”
Someone on CNN and Fox News Agree About Gas Station Owners
The $5-plus summertime gas prices were noticed by the White House. After prices dipped again, they chimed in saying the previously high prices were partly COVID and the Russian war in Ukraine. They also gave the usual blaming of big oil. However, the president, or someone on his staff, went further: They tweeted out that some of the blame is on gas station owners; with the hair-splitting distinction of blaming companies that own gas stations.
In July, CNN commentator Oliver Darcy discussed the president’s tweet, which said, in part, “Bring down the price you are charging at the pump to reflect the cost you’re paying for the product.”
Though he has a conservative background, Darcy wrote for and commented with former CNN far-left media critic Brian Stelter on the network. The commentator was talking about the lack of media scrutiny over this clearly misleading tweet. But Darcy also said, “We know gas station owners aren’t really the ones running away to the bank when gas prices go up.”
In an interview with Sal Risalvato, Fox Business host and economist Neil Cavuto said, “I actually try to give the benefit of the doubt to the administration.” However, regarding the Biden team’s ambiguous idea that gas station owners are seeing seriously higher profits, Cavuto followed with: “They know that is a foolish argument; I think they know that. You can’t be totally ignorant of these basic economics, and supply and demand.”
Cavuto disputes the hairsplitting distinction as well, claiming less than 4% of stations are owned by oil companies. That figure is backed by the American Petroleum Institute.
In a freakishly polarized American media landscape, when airtime on both teams supports an idea, that matters.
The Gas Station Owner Takes a Lot of Risks
An article published on LinkedIn last year gave an indication of who’s behind the gas station business. Single-store ownership is the norm for retail gas outlets. Whether they own a single trademarked/franchised gas station or an independent one, it’s 60%. That figure has think-tank backing too.
Gas station owners, like all business owners, have assets, liabilities, contracts, margins, and risks. The last one is serious. For starters, most contracts to buy fuel from oil companies are exclusive and last ten years, according to Hossain. But there are other liabilities too.
Gas Station Business Experts Give Rundown on Fuel Supply Agreement and Profits
Shabbir Hossain is the author of “How to Start, Run and Grow a Successful Gas Station Business” and Gas Station Business Smart Start-Up.
He started as an authorized dealer with a BP station in Alabama. Within a few years, he owned seven gas stations. From there he has owned other retailers, small businesses, and franchises.
In his 45th podcast on the topic of effective gas station ownership, he discussed the fuel supplier agreement. He goes into detail on the 23 sections. There are some differences between a branded and non-branded contract, but the key aspects of the fuel contract are discussed below.
The Basic Fuel Supply Agreement Terms from GSB-45: What is a Fuel Supply Agreement?
- product and schedule: the type of petroleum being purchased, the brand (Texaco, etc.), and the grades like premium, plus, or diesel
- rack prices: the wholesale price
- quantity: how much a gas station can, and in many cases must buy
- allocation: waivers in the case that gas can’t be supplied to the station
With these basic stipulations alone, there are a lot of unknowns about the gas station owner. They’re “known unknowns,” but big ones.
Looking at the Basic Fuel Supply Terms
According to Hossain, products, and schedules often have with it exclusive supply rights. Attached is usually a six-figure fine if the station owners breach this fealty.
Rack prices are wholesale prices paid by the station owners, Shabbir says. Rack is reasonably persistent in pricing across the US, with the usual variation of 2 to 5 cents, he claims. The graph below from the federal Energy Information Agency shows what the “rack” price was in Colorado from the late ‘90s into the 2010s. It indicates there is not a significant markup made by gas stations.
(Interactive graphing plug-in: Regular Gasoline Rack Prices (eia.gov)
Rack pricing is usually close to what the gas station owner charges. Risalvato, points out how a sale of $45 in gasoline gets the proprietor around $3. But a cup of coffee, meanwhile, has an 80% profit margin. The problem, he says, is “if you don’t sell them the gas, they’re not going to be there to buy the cup of coffee.”
Quantity is the usual monthly purchasing volume. Hossain says the suppliers generally have a required purchasing volume. Even fuel suppliers recommend contracting for less than what the station owner expects to sell. Underselling can have a sting too, says Hossain: a per gallon fee.
Allocation, from the description Hossain gives, is favorable to the fuel supplier: Natural disasters or other problems can limit the fuel assets of the supplier. And if that happens, the gas station owner can’t sue them.
In Short, the Gas Station Relies on Gas but Makes Money Elsewhere, with Risk
Owning and making a profit with a gas station requires a lot of foresight and business skill. The gas takes up the most space, far and away, but gives a small profit. The price of gasoline per gallon is not very flexible, nor is it very profitable without selling large volumes. Hossain says that high-volume dealers can get a nice incentive discount. As such, certain wholesalers (petroleum or otherwise) like Walmart or BJ’s make it harder for the Mom-and-Pop to compete in the all-powerful price-per-gallon.
As such, the gas station owner takes chances and fights to keep things going. America has 27 million cars. People drive, so gas stations are always needed. But even for such high demand, the risk is surprisingly high as well.
