Nearly 40 million Americans fill up their vehicles every day, and gasoline purchases account for approximately 5% of consumer household spending per year.
Consumers recognize when gas prices change—and some are willing to drive 10 minutes out of their way to save a few cents per gallon. Historically, two in three consumers shop for fuel based on price, whether gas was as low as $1.62 per gallon at the start of 2009, or as high as $3.28 per gallon at the start of both 2022 and 2023.
What’s In a Gallon of Fuel?
The main components of retail gasoline prices are the cost of crude oil, taxes, refining costs, and distribution and marketing costs. (www.eia.gov)
The price of crude oil has the largest impact on gas prices. There are 42 gallons of oil per barrel. Retail gasoline prices move an estimated 2.4 cents per gallon for every $1 change in the price per barrel. Although this is not an exact calculation, it demonstrates how gas prices change when crude oil prices change.
Federal, state and local government taxes contribute to the retail price of gasoline. The federal excise tax is 18.4 cents per gallon for gasoline, and 24.4 cents per gallon for diesel. (www.eia.gov)
In 2022, the cost of crude oil was 57% of the price of a gallon of gasoline, and the cost of refining the oil was another 18%. The remaining cost was taxes (13%) and distribution and marketing (12%).
Ownership and Supply Arrangements
Less than 0.2% of all convenience stores that sell gas are owned by a major oil companies, and about 4% are owned by a refining company. Regardless of their fuel brand, most convenience stores (95%) are owned by independent companies, whether one-store operators or regional chains. Each company has a different business strategies, which can dictate the type of fuel they buy.
Four broad factors can impact retail fuel prices:
- Fuel type: Stores that sell fuel under the brand name of a refiner typically pay a premium for that fuel, which covers marketing support and signage, as well as the proprietary fuel’s additive package. These stores may not experience as much wholesale price volatility during supply disruptions.
- Delivery method: Retailers who purchase fuels via “dealer tank wagon” have fuel delivered directly to the station by the refiner. These retailers may pay a higher price than those that receive fuel at “the rack” or terminal. In addition, retailers may contract with a jobber to deliver fuel to their stations or operate their own trucks, and the choice will influence overall costs.
- Length of contract: Retailers may have long-term contracts with a specific refiner. The length of the contract, which can be 10 or more years, and associated terms of that contract can affect the price retailers pay for fuel.
- Volume: Retailers may receive a better deal based on the amount of fuel they purchase, whether based on volume per store or total number of stores.
Within a specific company, stores may not have the same arrangements. Companies often sell multiple brands of fuels, especially if they have acquired sites with existing supply contracts.
Sales Strategies Impact Gas Prices
Retailers often consider whether to sell gas at a low profit per unit and make up for it on volume, or sell gas at a higher profit per unit and expect less volume. Location can also be a factor. For example, stores located in areas where real estate costs are high may pass along a cost of business when setting their retail fuel prices. Some stores may factor in seasonality, particularly if they are in a location where customer traffic dramatically changes during the summer and winter months. Other stores may be in a competitive market where consumers have ample choices of where to shop.
Other considerations may come into play:
- Wholesale gas price changes: Competing retailers may have different wholesale prices based on the terms of their fuel purchase (as noted above) and when they purchased their fuel, especially during times of extreme price volatility. Gasoline is a commodity, and its wholesale price can have wild swings. It’s not unusual to see wholesale price swings of 10 cents or more during the day.
Depending on sales volumes and storage capacity, some retailers may receive three deliveries a day, while others receive one delivery every three days. Retailers may not be able to adjust their prices when wholesale prices increase because a competitor may not be experiencing an increase in their cost of goods sold. Conversely, a retailer may adjust gas prices when the competition adjusts prices, either following or in advance of a fuel shipment.
- Contracts: How retailers buy fuel impacts their pricing strategy. Retailers sign long-term contracts that may dictate the amount and frequency of their fuel shipments. When supplies are tight, retailers with long-term contracts may have lower wholesale costs than retailers who compete for a limited supply on the open market. When supplies are constrained, those with long-term contracts may face allocations (a maximum amount of fuel that they may obtain) on the amount of fuel they receive. Those without these contracts may be unable to purchase fuel for a period of time or be forced to pay a significant premium.
- Brand: Where the retailer buys fuel also affects pricing strategies. Branded retailers often pay a premium for fuel in exchange for marketing support, imaging and other benefits. Branded retailers typically have the least choice in how they obtain fuel, or at what price, but that is offset by the benefits a brand provides.
Each factor adds complexity to a retailer’s pricing strategy and can create unusual market dynamics. There are times when a retailer with the highest posted gas price in an area could be making the least profit per gallon based on when, how and where the fuel was purchased.
No matter the pricing strategy, retailers tend to reduce their markup to remain competitive with nearby stores when their wholesale gas prices increase. This can lead to a several-day lag from the time wholesale prices rise until retail prices rise. Likewise, when wholesale gas prices decrease, retailers may be able to extend their markup and recover lost profits, with retail gas prices dropping slower than wholesale prices.