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

 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.