Why Gas Prices Vary Around the Country, or Around the Corner

Why are prices in California so much more than in South Carolina, or the national average? And how can they vary so much in one town? It comes down to three broad factors: taxes, fuel blends and margins.
February 13, 2018

The year 2018 began with gas prices at $2.49 per gallon, according to AAA. However, prices varied by more than $1 per gallon between the state with the cheapest (Missouri at $2.21) and most expensive (Hawaii at $3.28; California was the most expensive in the continental U.S. at $3.11).

Why were prices in Hawaii and California so much more than in Missouri and the nine other states that had prices at $2.28 or less—or the national average? It comes down to three broad factors: taxes, fuel blends and margins. 

Taxes
Taxes play a role in price variations by state. All retailers must assess the 18.4-cent federal excise tax and states also have additional excise taxes — or other taxes on gasoline. At the beginning of 2018, these combined taxes averaged 51.96 cents per gallon, ranging from a high of 77.1 in Pennsylvania to a low of 30.7 in Alaska, according to the American Petroleum Institute. (California’s is 71.89 and Hawaii’s is 64.43; meanwhile Missouri’s is 35.75).

Fuel Blends
Because California requires unique fuel blends that are not required anywhere else in the country, it is very susceptible to any supply outages. For instance, refineries in California faced many problems in 2015 that disrupted production. Because fuel could not be easily supplied from nearby states, which have different fuel specifications, pipelines cannot supply new fuel to the state when there are shortages. Instead, it must be barged in, which takes more time. During these shortages, prices can often spike by 50 cents or more in a short period of time before product is resupplied.

Another factor in higher prices is that California’s fuel blend is more complicated—and costly—to produce, adding upwards of another few cents to the price.

Areas like Atlanta felt similar pressure in September 2016 with a major disruption to the Colonial Pipeline. Because there were limited options beyond pipelines to provide regional fuels, the area saw strong short-term price spikes until supply increased, partially because waivers were granted to allow other non-compliant fuels to be brought to the market.

And in 2017 supply and distribution problems were common following hurricanes Harvey and Irma, creating wide wholesale price disparities based on availability of product and proximity to pipelines, among other factors.

Margins

Across the country, gas sales at convenience stores account for 58% of revenue dollars but only 34% of profit dollars. Put another way, gas sales drive customer traffic but in-store sales drive the business—and increasingly in-store sales dollars are coming from the sale of prepared foods. This is particularly true in the Northeast, where customers expect to get fresh food in stores that have reputations more as food sellers than fuel retailers. These stores are more likely to sell unbranded fuel (which is often the store’s “brand”), as opposed to branded fuel. For example, Wawa began selling fuel only 20 years ago.

California, on the other hand, is much more dominated by stores that sell branded fuels, whether ampm, Arco or other brands. In addition, California is also saturated with quick-service options at other outlets, whether In-and-Out Burger, Del Taco or other national brands. Because of these two factors, consumers are less likely to think of the fuel retailer as the place to also get a sandwich or snack. The numbers bear this out. In 2016, retailers in the Northeast had only 31% of their profits come from fuels, while fuels accounted for 70% of profit dollars in the West.

With so much of a dependence on fuel for sales in the West, retailers also are dependent on fuels for profits and often extend margins. Fuel margins are higher in California because retailers don’t have the same in-store sales to help drive their profits.

Price Disparities in Local Markets
Some of the same factors that affect retailers in California can also play a role in price disparities in a local market. Taxes may be higher in one part of town, or there may be different fuel blends required. But more likely, prices vary because of different wholesale costs or business strategies.

Wholesale Costs
Wholesale costs for retailers in a given market may vary by 10 or even 20 cents per gallons. Retailers don’t necessarily pay the same wholesale prices for a variety of factors, but here are four main factors:

  1. Volume: Like in any business, there are volume discounts. Those selling more fuel likely have a better wholesale price. 
  2. Brand: Branded gasoline—fuel that carries the name of a major refinery—tends to cost more because the company is also providing other valuable services to the business, whether proprietary market intelligence or marketing support, or in providing a recognized brand of fuel. Approximately one in nine (11%) consumers say that brand is an important criterion in determining where they buy gas.
  3. Competition: In some particularly competitive market areas, a branded operator may get a price discount so that the brand is more competitive in that market. That market area may be as small as an intersection, and retailers outside of that area may have higher wholesale costs for the same brand.
  4. Real estate: The cost to acquire real estate is higher at sought-after convenient corners. A retailer at one of these locations typically is paying much more that someone on the outskirts of town.

Business Strategies
Gas prices are also affected by business strategies of that particular location. In most cases, this business strategy considers in-store traffic and traffic throughout the year. For instance, a store near an airport will likely enjoy strong gas sales but weak in-store sales. Most customers on their way to the airport are in a hurry to return their rental car and get to the airport. They are much less likely to go inside the store and pick up snacks or drinks, especially if these items can’t be taken through security checkpoints.

Also, seasonality may play a role. In vacation areas, stores may have very strong customer traffic for several months, and then almost no traffic off season. These stores often need to examine how they can manage operations in a compressed timeframe.