09/13/2012
Category: How to get started?, Software


I’ve worked in the gasoline pricing industry now for almost eight years.

I’ve spent years helping corporations gain more control over their gas prices.

When you fill your car up with your eighteen gallons and pay $3.99 a gallon it feels like a rip off right?

And the guy who owns the station must be making 75% margin?

It turns out that this is entirely incorrect.

Here is an overview of what I have learned over the past years related to this every day commodity that we rely so heavily upon.

A barrel of crude oil

A barrel of oil is used to create finished gallons of gasoline.

When we hear the news report “A barrel of Oil is trading at $96 per barrel”, that is only an indication of the major ingredient that goes into processing and creating a gallon of gasoline.

See NYMEX current trading value of a barrel of Crude Oil.

We should think of the price of a barrel of oil as an indication of where gasoline pricing may be headed.  Sometimes when the price of a barrel goes up, retail gasoline operators will raise their price in anticipation of their wholesale cost going up.

But it is only that, anticipation.

So much of the gasoline markets are influenced by emotions, speculation and forecasting.  When Oil prices rise, it is a reasonable indicator that so will a gallon of gasoline (finished and refined).

A finished gallon of Gasoline (RBOB)

Before a gallon of Gasoline makes it into your car, it has to be picked up and then transported from a Terminal.  Picture in your mind a pipeline, big giant tanks and eighteen-wheelers filling up their 8000 gallon tanks.

When the trucking or hauling company picks up this load the product cost contains a couple of key elements:

  • Finished product cost
  • Pipeline transportation fees
  • Terminal fees.

As an estimate a gallon may cost around $3.30 at this point in the process.

See NYMEX current pricing for a gallon of finished Gasoline.

Freight Delivery

Once the hauling provider picks up the load of gasoline to be delivered to the convenience store, the meter starts ticking.  The freight or transportation cost is added on based on the number of miles it has to be driven or transported for delivery.

Therefore the longer the distance from the Terminal pick up point, the greater the price of delivery.

For example purposes let’s say it is approximately $.099 per gallon added to the price.

A lot of companies will estimate their freight cost based on the zip code for delivery.

For instance an operator may have two seperate Terminal locations to pull from and they may pull a load (8,000 gallon truck) from Terminal A on Monday because it is $.0245 cheaper per gallon than Terminal B is.

Retail Gasoline is priced in real-time based on the most amount of information available.

It is rare that a company actually knows in real-time what their actual product cost is.

As a result they have to use estimates, like estimated freight charges based on the deliver location or zip code of a particular store location.

Taxes

Taxes function largely the same way but are generally fixed based on the county, state, township, etc.

Taxes are more static in nature than freight charges.  Contained within tax charges are both Federal and State taxes.

Estimate $.219 per gallon.

Surcharges and Additions

Some companies add additional charges to their estimated product cost.  For instance a trucking company may add a fuel surcharge on top of their already existing delivery charge.

As the cost of fuel rises some companies will add variable charges to help compensate for their own rising cost of business.

Example surcharge $.0109

Credit Card companies charge retailers for the processing of each transaction.

When you and I use our credit card, they convenience store operator has to pay a % of the transaction to the Credit Card Company.

Credit Card companies often make much more money than the Convenience Store operator.

3.5% is an approximate amount that a Retailer may be accustomed to paying in Credit Card fees.

Translated that is approximately $.14 per gallon of Gasoline sold ($3.99 per gallon).

Totals

Base + Transport 3.300
Freight 0.099
taxes 0.219
Surcharges 0.109
additions 0.140
 Total costs 3.867
 Price x Gallon 3.999

 Gross Margin Profit

$.12 per gallon.

Yep.  All of that to make $.12 cents per gallon sold.

Most industries would never tolerate a less than 8% return on investment on a Gross Margin basis.

By the time they pay for the facility, the labor, the upkeep and marketing it results in a skinny Net Profit.

Conclusion

As you fill up your car and see the total cost per fill-up increase, remember that at best the only entity that is getting rich, if anyone, is the Federal and State government combined with the Credit Card companies.

On your $60 fill up the average convenience store operator is making less than $2.25.

I’d rather sell software for a living.

  • http://Aaronmchugh.com/ Aaron McHugh

    Jody-$.12 does not sound so wealthy does it? Love that you guys lived the Epic story this summer and concurrently building software. Bummer that Steve is back in the 9 to 5. When youve tasted more I bet “normal” is not so appetizing.
    Be well.

  • http://www.clayproductions.com/aaron/ Aaron Johnson

    Aaron, thanks for breaking this down. I thought I’d relate an interesting story. I was on a hike and ran into a former VP of one of the oil giants. I asked him for his take on the rapidly growing costs of gas. He pointed his finger back at the companies like his, saying that during the 80′s and 90′s, they didn’t pour their profits back into physical plant (refineries), and now they are playing catch-up. He said that if you walk around a refinery, you’ll see stuff broken, rusted, leaking, and on fire! I’m sure this is only one part of the equation, but it sounds like a significant one.

    • Aaron McHugh

      Aaron thanks for that first person tid-bit. That does make sense. Nothing is free in this world so lets assume that Oil Giants will lower our prices in five years after they get the refineries up to par? Yeah right.

  • Scott Margherio

    States and Fed are actually in even deeper into our pockets. You’re being kind to them brother! :). Federal tax is 18 cents/gallon and State taxes range from 20-42 cents per gallon (cpg) all by themselves. So all in total Federal and State taxes combined are anywhere from 38-60 cpg depending on your State.

    Typical retail margin per gallon is 6-12 cents. Branded retailers (Shell, Mobil, BP/Amoco…) being hire margin (because they are typically hire priced) and competitive unbranded retailers on lower end. (RaceTrac, QuikTrip, Costco…)

    The interesting thing is that most consumers don’t realize that gasoline is fungible meaning it is all commingled. The base gasoline in a truck delivering to a Shell station came out of the same wholesale terminal tank as the gasoline being delivered to the RaceTrac… The only difference is the additive (cleaning agents) being injected into the truck while the base gasoline is being injected. BOTH additives meet minimum federal standards.

    • http://Aaronmchugh.com/ Aaron McHugh

      Scott I love your Expert Insight. You’ve logged a lot of years in this world of Gasoline. Retail Margins of $.06 per gallon……so much less than the average consumer would ever believe. Big Oil does not seem so Big when viewed this way. Keep going. Thanks for weighing in with us.

  • http://www.facebook.com/keith.a.sr2 Keith Anthony Williams Sr

    Is it true that the CEO of Exxon made 25 million plus in 2011?

    • http://Aaronmchugh.com/ Aaron McHugh

      Keith-Looks like he made $40.3M. Here is a quick excerpt from a news article from the Dallas Morning News. http://goo.gl/oJAg5

      Exxon Mobil chief executive Rex Tillerson got a 15 percent pay hike to $40.3 million last year, according to a regulatory filing from the Irving-based oil giant released Friday.
      Tillerson, 61, who was named chairman and CEO in 2006, led the company to a $44.9 billion profit last year. That comes close to returning to Exxon’s record earnings of $45.2 billion in 2008 — when it earned more money in a single year than any corporation in history.

, , , , , , ,

Posted on: 09 / 13 / 2012