Gas Station Economics

Factual Questions
1

What with the current rise in gas prices, I got to thinking about how the stations run their businesses.

Now, as I understand it, gas stations have very large tanks underneath the station. These are filled when they get low, which, unless there are some very unusual circumstances, is not, to my knowledge, every day. Let us assume it is once a week. Now, my question is, why do gas stations not set the price of a gallon of gas to what it was when the tank was filled?

Grocery store owners don’t check the price of milk or coffee beans every day, and change the price accordingly. They don’t check the price of grain and change the price of bread DAILY. Restaurants don’t find out the beef and pork prices and charge more. These things all happen when the price of the next shipment goes up. NOT daily.

(Assuming I have a correct general idea of how things work)

Example: Gas station gets a shipment of 10,000 gallons of gas costing total $5000. Let’s figure a 50 cent (state, local, whatever) tax (on the sale to the consumer), bringing the total cost per gallon (before profit) to $1.00. Let’s say the station wants a 10 cent profit per gallon, so they charge the consumer $1.10 per gallon. Now, the station could charge this amount until that shipment of gas ran out making a profit, no matter how the price of gas fluctuated.

So, my question is, why don’t things work this way?

2

WAG, but I would say that it has to do with competition. If the competition is charging less for their gas then you would probably want to lower yours too, so that you don’t lose customers. If the competition raised their prices then you can raise your prices so that you make more. However, I don’t know why you wouldn’t keep them lower so that you attracted more business.

3

Here’s one online discussion of it at GasPriceWatch.com.

And this is from Liberty Haven:

4

I understand that gas stations operate on very slim profits (I think I heard a nickle a gallon). That means that there’s not a lot of reserve when their costs increase. Let’s say that they’re making 5 cents/gallon. And let’s say the wholesale cost of the gas they sell increases 25 cents/gallon. If they bought 10,000 gallons of gas at $1/gallon (including all taxes, overhead, etc.) and sold it at $1.05/gallon (don’t you wish!) then they paid $10,000 and made $10,500. Now their tanks are empty and they have to buy gas that is now costing them (again with all of the associated costs) $1.25/gallon. 10,000 gallons would cost them $11,250. What are they going to do if they don’t have the other $750? By raising prices according to the current cost of their product, they can be assured of having enough cash on-hand to replenish it and make a profit.

What bothers me is that prices vary so much. Yesterday my friend in Aberdeen, WA said regular gas is $1.42/gallon. Here in Los Hideous, the price is about $1.94/gallon. Sure, California gas needs additives so it will meet strict emmissions standards, but I don’t think it’s 50 cents/gallon more! In addition, I heard that Exxon is reporting a $5 billion profit this quarter (someone will correct me if I’m wrong). This is at the same time that they and other petroleum companies are under investigation for price gouging, when the State of California is investigating power companies for price gouging, people are up in arms about the high cost of fuel, etc.

There was a fire at a local refinery and the owner said that the fire would not affect production. Nevertheless, prices rose 10 cents/gallon the day after the announcement because buyers thought production would be affected (or so they said).

Furthermore, prices rise every summer and every winter “because of increased demand”. The oil companies have been at this business a long time. You think they’d know when demand increases and increase supplies accordingly. IMO, they are either lying about supply and are increasing prices because "everybody knows demand increases and supplies dwindle) or they are deliberately withholding production so that supplies will dwindle and they can raise prices. Or they’re just incompetent and can’t figure out that they need to increase supplies to meet demand.

The bottom line is that they have consumers over a barrel (pun intended). Most people cannot not buy gas. I think that eventually people will be fed up and alternative energy will become more common. Or the cost of gas will become so high that people will switch to high-mileage hybrid-electric vehicles, pure electric vehicles, or fuel-cell powered electric vehicles.

As for myself, I’m riding my motorcycle more. I expect my gasoline bill to fall from about $200/month to about $100/month. The oil companies would make more money from me if they lowered their prices, as I’d be more inclined to drive the Jeep.

5

So, suppose the reverse case. Gas everywhere is $1.60 today but you get to your gas station and it’s $1.80 because he bought it ten days ago when it was higher. Do you (a) think, of course I should pay more for the gas since it is last week’s vintage, or (b) go get it cheaper at the other station? Huh?

Ever heard of the concept of “replacement cost”?? If you own a gas station with a megatank full of gas, what you paid for that gas is quite irrelevant to setting your sale price which would be set by market conditions and by the cost of replacing that gas when you sell it. What you paid for it counts for nothing.

Buyers do not care what the seller paid, they care about getting the cheapest price.

Sellers want to get the best price they can. That’s it.

6

You don’t shop close enough to college campuses. Grocery stores near college campuses, to my experience, definitely do make adjustments in their prices on a daily and sometimes even more frequent basis.

One of the wildest days of my four years of undergrad was the day the two nearby grocery stores got into a price war on soft drinks. I think one of them finally got down to like US$0.12 for a 2-liter bottle before they both ran out of stock.

No, I’m not saying this is typical. But it does happen.