By Jeff Lenard
ALEXANDRIA, Va.—The question we’re hearing is, why aren’t gas prices falling faster now that crude oil prices have dropped?
The answer isn’t that cut and dry.
Although gas prices are greatly affected by oil prices, linking the two to current prices has its caveats.
(Even President Biden has taken to Twitter to complain about gas prices. “Oil prices are decreasing, gas prices should, too,” Biden tweeted.)
Typically, retailers attempt to price their fuel based on replacement cost. In other words, the cost to pay for the next shipment of fuel, which is about 8,000 gallons. However, a specific station may receive less if the truck is delivering to multiple locations. The typical convenience store sells more than 5,000 gallons of fuel per day, so it’s not unusual to receive daily deliveries, with larger-volume stores seeing multiple deliveries per day. These deliveries during times of rapidly increasing wholesale prices tend to cost more.
When wholesale prices are rising, retailers may hold back the full price increase. It’s often like a game of “chicken” to see who blinks first and raises their gas price to pass along the increased wholesale costs. In this scenario, the first retailer to fully adjust prices higher could lose customers to the competition, so most retailers will opt to cut margin and absorb some of the price increase. This is what happened in March 2022 when wholesale prices jumped by 20 cents or more for multiple days, while gas prices rose by a smaller 10 or so cents per gallon during the same period.
Retail fuel gross margins (before expenses) have averaged about 30 cents per gallon over the past five years. After expenses, which can be 15 to 20 cents per gallon, a retailer typically sees profit of 10, maybe 15, cents a gallon. When margins constrict, like the week of March 7 when gross margins were 18.7 cents per gallon, according to OPIS, retailers are often lucky to break even.
When oil prices begin to decline from a peak, consumers may expect retail gas prices to immediately follow suit. Instead, the lag continues and can take a few days for any price decreases to be felt at the retail level and even up to a few weeks for the decrease to be fully reflected.
First, just like when wholesale prices climb, retailers may hold their gas prices despite a lower-cost delivery to make up for the margin they lost during the price increase. On any given day, retailers don’t know where wholesale prices could be heading, so they try to recapture lost margin as quickly as possible—because they don’t know if wholesale prices may rise and constrict margins again. This means that retailers may pass along a smaller percentage of the wholesale price decrease.
Second, there is often softer demand after a period of price increases. When gas prices are a top news story, drivers often fill up in anticipation of higher prices tomorrow, even if it’s outside of their regular purchasing pattern of buying gas once a week. When more drivers are topping off gas tanks, demand slows and that affects when retailers schedule their next fuel delivery.
It’s often said, although not accurate, that gas prices rise like a rocket and fall like a feather. A prolonged period of rising oil and wholesale gas prices leads to retail price increases, and lower oil and wholesale prices lead to lower retail prices. It just may not appear to happen as quickly as customers would like.
Read the rest of the story in this month’s Convenience Corner blog post.
Jeff Lenard is NACS’ vice president of strategic initiatives, and he took a cross-country road trip in a large RV that was unfortunately timed for July 2008 when gas prices reached a then-record $4.11 a gallon, which is $5.33 in today’s dollars. And he always paid cash to help reduce retailers’ credit card swipe fees.