April 24, 2008 11:44

The people selling gas feel your pain

This afternoon I'm driving home to Salisbury, which for a Manhattanite like me means renting a car and realizing, suddenly, that gas is expensive. $3.50 a gallon? Dang.

When I go for my $40 fill up, though, I will try not to guffaw too loudly in the direction of the person running the gas station, because chance are, he's suffering right along with me.

The economics of selling gas right now—to use a technical term—suck. A typical gross margin on a gallon of gas is about 14 cents, but with the price of wholesale gas skyrocketing and stations not able to raise consumer prices quickly enough to keep up, that margin is down to about 9 cents, according to Oil Price Information Service. Once you subtract costs (fees from credit card transactions alone can reach 9 cents), there are stations out there actually losing money each time they sell you a gallon of gas, and hoping beyond hope that you spend enough on cigarettes, slushies and car washes to make up for it.

Now, next week the big oil companies start reporting earnings, and they'll be spectacular—but don't confuse those companies with the ones selling you your gas. For years, they've been getting out of the service station business. Today, most of the stores with Exxon or Shell or BP signs out front are franchises. And many of those are run by small businessmen. Of the 115,000 or so convenience stores selling gas in the U.S., about 62% are one-store operations, according to the trade group National Association of Convenience Stores (NACS).

So, why doesn't everyone just raise prices? Well, see, that's problematic because the more the cost of gas goes up in general, the more price sensitive consumers get. A recent survey by NACS found that 29% of people would drive 10 minutes out of their way to save 3 cents on a gallon of gas. "If you get a 5-cent overnight increase, you might only pass on 2 cents or no cents," says Jeff Lenard, NACS's communications veep. "If you raise your prices 5 cents and your competition doesn't, you might as well close your store for the day."

Plus, with more big box stores—the Wal-Marts and Costcos of the world—selling gas there's even more downward pressure on margins. Gas might sound like a nice loss leader to Wal-Mart, but to a guy with two kwiki-marts, that's a little harder to pull off over long stretches of time. Here's how things have shaken out over time:

So today's life lesson is be nice to the people selling you gas.