Why Gas Prices Fluctuate (Did You Know 95% of Gas Stations Are Owned By Independent Convenience Store Companies?)

Why are gas prices too damn high?!

I came across this really interesting article on Herman Cain’s website CainTV (You’ll remember him as the black Pizza Businessman that ran for Republican President in 2012), posted on JobCreator’s.net, and thought I’d share it (which they encourage, they even write at the bottom of the article… “Please steal our stuff!” :D)

Gas Prices And My Mom
by KATHY HOEKSTRA

As I drove my kids home from school Monday, I noted a nearby gas station had regular unleaded posted at $3.74 per gallon. My children will attest to the next part. As we drove by, I announced to them that “after I drop you guys off, I’m coming back to fill up, because the two stations a half mile down the road has it for $3.99 a gallon.”

For a 2003 Ford Explorer, that’s a pretty significant savings.

Less than 20 minutes later, I returned to take advantage of this quarter-per-gallon difference, only to find the price had jumped to the same $3.99 per gallon as its competitors down the street.

When I realized how much more I’d be forking over to fill my SUV, I heard echoes of conversations my late mother and I had over gas prices. (“Conversations”, by the way, is a polite word for outright arguments between mothers and daughters.)

Notice of any fluctuation in the price of gasoline would inevitably prompt numerous complaints from my mom. The most common of which became the basis of our frequent ‘conversations’: Her belief that gas station owners collude with one another to rig prices so as to make tons of money from gasoline sales at the expense of hardworking, taxpaying motorists.

My mother was a smart woman. But her career path of registered nurse-turned-college instructor took her nowhere near energy policy or economics. Like many Americans, she simply never took the time to see how gas prices are determined and just who benefits from them.

My trade, on the other hand, is journalism that has conjoined with public policy. I tried to counter her arguments with at least rudimentary facts and logic to prove her wrong, but I failed on every level. I know fuel sales profits are miniscule for retailers. I know commodities futures play a role in wholesale gas prices, and this has a big impact on how retailers set their prices. I also know ‘Big Oil’ doesn’t own each individual retailer.

But try telling any of this to my mother.

I may have had more success if I had the National Association of Convenience Stores’ Annual Fuels Report 2011 in hand during these ‘conversations’. Since convenience stores (a.k.a. small businesses) sell about 80 percent of all the fuel bought in the United States, the NACS knows of which it speaks.

Everyone remembers this black guy? Right? RIGHT?!

I’d be able to tell my mom the following, and show it to her in black and white:

* The typical retailer averages about 3 cents per gallon in profit. This is based on the premise that it costs a retailer some 12 cents to sell a gallon of gasoline, with a five year average markup of 15 cents. Consider as well that credit card fees per transaction can eat into even that 3 cent profit. In fact, in 2009, credit and debit card fees averaged 4.7 cents per gallon, with plastic used for 60 to 70 percent of all transactions at the pump. Gas stations make a much bigger profit on non-fuel sales.

* Small businesses ‘often don’t have the resources to brand their stores as anything beyond the brand of fuel they sell.’ That leads people like my mom to think all gas stations are owned by ‘big oil’. In reality, 95 percent of stores are owned by independent convenience store companies (only one percent, by the way, is owned by one of the ‘big oil’ companies.)

* Motor fuel sales accounted for more than two-thirds of all convenience store sales in 2009. But with low profit margins, fuel sales brought in less than one third of the stores’ gross margin dollars. (In normal-speak, this means gasoline sales accounted for two-thirds of the stores’ revenue but only one-third of the stores’ profits.)

NACS also provides a handy primer on just what influences gas prices, boiling it down to two basic areas.

First, the retailer itself:

* Branded vs. Unbranded Fuel – This is like my local grocery store which pays much more to sell General Mills’ Cinnamon Toast Crunch cereal vs. its generic brand called ‘Cinnamon Swirls’. Therefore, the store has to charge me more for General Mills’ cereals than its own brand. Like the grocery store, fuel retailers pay more for brand name fuel, which means they have to charge a little more at the pump.

* Dealer Tank Wagon vs. Rack – Basically, a ‘tank wagon’ delivers fuel right to the gas station. This may cost more than the retailer having to go get it from a ‘rack’ or terminal.

* Length of Contract – A retailer could have a long-term contract with a specific refiner. A contract can be for 20 years or longer, which NACS says can also affect the price a retailer pays for fuel.

* Volume – As with nearly all other businesses, fuel retailers could get a better deal buying in bulk.

Secondly, and much more impactful, is what happens before the gasoline even reaches the retailer:

* Crude Oil Prices – According to NACS, this is the granddaddy of all gas price influencers. Not only does the cost of crude oil account for 68 percent of the retail price of gasoline, but they can have “huge swings.” And with about 42 gallons in a barrel, “a rough calculation is that retail prices ultimately move approximately 2.5 cents for every $1 change in the price of crude oil.”

* Replacement Costs – Since stores typically sell 120,000 gallons of gas a month, they need to think about how much they’ll shell out for their next fuel shipment. As NACS puts it, “even slight wholesale price variations can increase a retailer’s replacement cost by hundreds – or even thousands – of dollars.”

* Taxes – These have nowhere near the impact on our day to day gas prices as the crude oil fluctuations. While there is much to be debated about the federal and state fuel taxes, it is highly improbable there was a 25 cents per gallon tax increase in the Michigan town over a 20 minute period on a Monday afternoon.

That leaves refining costs and distribution/marketing, which, like taxes, tend to be more static in terms of the frequent price hikes and drops we see on a day-to-day basis.

I’ll never know if all of these facts would have convinced my mom to let go of her lifelong stable of preconceived – and incorrect – notions about why gas prices at all the neighborhood stations go up the same amount all within a few hours of each other.

But it’s not too late to explain to my kids on the next trip home from school. And they’re both boys. I do not anticipate the same degree of ‘conversation’ on this topic.