NACS' Eichberger Explains Retail Market Dynamics

Shares retailers' perspective in Congressional hearing that examines rising gas prices.

March 08, 2012

WASHINGTON - "The retail fuels market is a complex system that is influenced by a wide number of factors. The best strategy for providing long-term relief and stability to consumers is to enact a comprehensive transportation energy policy," NACS Vice President of Government Relations told Congress in testimony on Wednesday.

Eichberger was one of seven experts asked to testify before the House Energy and Commerce??s Subcommittee on Energy in the hearing, "The American Energy Initiative: A Focus on Rising Gas Prices."

"NACS does not believe that improved efficiency, enhanced sustainability, national energy security and economic growth are mutually exclusive objectives. But if they are not pursued in a strategic, coordinated effort they can lead to unintended consequences that can derail progress towards all of the objectives and, in the end, consumers will endure the brunt through higher prices at the pump. Enhancing supplies of traditional energy resources while conducting an orderly transition to alternatives is the best way to benefit consumers," said Eichberger.

Eichberger also explained the how fuel retailers operate, noting that they set prices based upon two factors: competition and cost.

"It is quite literally a street fight. We post our prices at 20 foot signs on the side of the road and empower consumers to shop for the best value at 45 miles per hour. In a survey this year, we found that 40 percent of customers will drive five minutes out of their way to save three cents per gallon."

"For the retailer, this means that they must post a price that is extremely competitive in their market," said Eichberger. "But we have to pay close attention to our costs as well. In 2011, on average it cost a retailer about 17 cents to sell a gallon of fuel. In 2011, the average gross margin was only 18.2 cents - so the average profit per gallon was about 1 to 2 cents."

So what can be done to help the consumer?

"Unfortunately, there is very little retailers can do other than to compete," he said. "Our gross margins so far this year are averaging 3.6%. There is not a lot of room for maneuvering, but retailers are doing what they can to offer their customers the best deal possible. Many are offering discounts to customers through a variety of programs. Retailers are doing what they can to attract the price sensitive consumer - but they are limited in what they can do."

Eichberger suggested that Congress should consider a few things to address current concerns over high gasoline prices:

Increase future supplies of oil. The U.S. will never replace Saudi Arabia in terms of oil production, but a commitment to increased production of domestic oil resources will send a signal to the market and will likely help mitigate the inflationary effect of speculative investment.

Evaluate costs of regulations. Every regulation will impose costs on the system and those costs will be passed through to the consumer. Congress and the administration have to make decisions about what they believe is in the best interest of the country, but they need to be aware that the ultimate payer for all regulations is the consumer.

Harmonize fuel regulations. The current CAFE proposal will render the Renewable Fuels Standard impossible. Using modest CAFE projections, the two policies will combine in 2022 to require 37% renewable fuels in every gallon of gasoline. This will cost the retail market at least $22 billion in equipment upgrades. Meanwhile, it is projected that only 15% of the vehicle fleet will be able to run on the fuel.

"I am not saying that either policy is bad, but I am pointing out that when we do not pursue a comprehensive fuels policy we end up establishing programs that contradict one another and impose unintended consequences on the market," stressed Eichberger.

Eichberger??s complete written testimony is online.