What Consumers Should Know When Gas Prices Soar

Many think station owners are profiting amid record-high gas prices, but the industry knows that’s not the case.

May 20, 2022

Woman about to pump gas

ALEXANDRIA, Va.—The convenience and fuel retailing industry knows that selling gas is a low margin business, but it can be hard to change the consumer’s perception that gas stations are rolling in the dough, especially when fuel prices hit record-high prices, reports The Boston Globe.

When oil prices start rising, fuel retailers have the difficult decision either eat some of the higher costs to save their customer base or pass along the costs and risk losing business—many opt to make less money on each gallon they sell in hopes that they can recoup those losses if crude prices later retreat, and they can lower the pump price more slowly than their costs decline.

“Someone in the supply chain is making money with gas at these prices, but it’s not the retailer,” Dave Ellard, who owns two Mobil-branded stations, in Attleboro and North Attleborough, Massachusetts, told the Globe.

The Globe lays out five things consumers should keep in mind about the gas station business.

There’s more to gas prices than the cost of crude oil. Profits can vary from station to station, as costs depend on a company’s size, whether it owns or leases its locations, brands sold, terms of its wholesale fuel contract, competition in the area, and business model, Jeff Lenard, NACS’ vice president of strategic initiatives, told the Globe.

Inside the store is the margin maker. Profit margins inside the convenience store are 20% to 30%, significantly higher than at the pumps, Lenard told the Globe citing NACS data. That’s why many owners try to keep their gas prices as close to the competition’s as possible.

“If you are 10 cents higher, you’ve not only lost your gas customer but your convenience store customer, too,” Lenard said.

Each of Ellard’s Mobil locations features a car wash.

“That is what I consider my main business,” he told the Globe. Customers can buy a wash at the pump, he said, “and I can offer a significant discount on the gas.”

Consumers only have so much to spend. If customers are spending more money on gas, they have less to spend inside the store, which adds pressure to gas station owners to protect the inside by making their gas prices as low as they can bear.

Also, as prices rise, customers pay more with credit and debit cards than with cash. Those transactions are expensive for the gas station: about 2.75% of the purchase. At Sanjay Patel’s Gulf and Citgo stations, customers are paying cash just 5% of the time, down from 25% when gas was in the $2 range in 2020.

“You know who’s making money? The banks,” John Howell, co-executive director of the New England Service Station & Auto Repair Association, told the Globe.

(Here’s how NACS is fighting swipe fees at the congressional level.)

Competition is fierce. Gas stations don’t want their gas to be the most expensive in the area, and a NACS survey found that two-thirds of respondents said that they would drive an extra five minutes to save 5 cents a gallon on gas.

Depending on their business, “Some stations get two or three shipments a week. Some get one a week, and some get three a day,” Lenard told the Globe. “When prices go up, there’s a reluctance to pass on the full increase. “Everyone is playing a game of chicken to hold on to customers.”

Global forces drive local prices. Close to 60% of the cost of a gallon of gasoline is based on the cost of crude oil, and this year oil is up 45% to $109 a barrel (and reached $130 in March). The cost rose due to restricted OPEC production, increased demand and sanctions on Russia after it invaded Ukraine.

“This is the most challenging summer to predict prices,” Patrick De Haan, head of petroleum analysis at Gas Buddy, told the Globe.

No expected relief from high gas prices is not good news to gas stations.

“Most gas stations are just trying to break even,” Ellard told the Globe. “Meanwhile, customers are looking at you like you are Mobil, because you are in their eyes.”

Here’s how to explain to customers why gas prices aren’t dropping quicker when the price of crude oil does drop.

NACS’ most recent blog post, “Is Gas Tax Relief a Good Idea?” discusses how easing consumer pain at the pump is a good idea, unless it causes more problems.

The Convenience Matters podcast episode “What’s the Tipping Point for Gas Prices?” explores how much pain at the pump that consumers will tolerate and what’s ahead for the summer driving season.