How Much Does Gasoline Actually Cost?
I’ve worked in the convenience retail industry now for over ten years. Everyone wants to know who makes all of the profits from the gasoline that we purchase as consumers.
When we fill up our cars and pay $3.99 a gallon it feels like someone must be getting rich.
It seems like the convenience store owner selling the gasoline must be making $3.88 a gallon.
It turns out that this is entirely incorrect.
Here is the truth.
The 5th grade-friendly explanation of the lifecycle of gasoline
- Dinosaur dies
- Two Billions years go by
- Big Oil company sucks the fossil fuel out of the earth
- Big smoke-stack-puffing refinery converts the dead dinosaur into crude oil
- Crude oil is used to make gasoline
- Gasoline is transported to a terminal for pickup
- A big eighteen-wheeler fills their tanker truck and delivers it to the convenience store
- We buy the gasoline
How does a barrel of crude oil influence the price of Gasoline?
Crude oil is the major ingredient required for processing and creating a gallon of gasoline.
The news media have conditioned us to tune our ears to reports about fluctuations in the price of crude oil. However, we don’t really understand the correlation to the price of gasoline. As consumers we are conditioned to listen selfishly asking ourselves the question, “How does this impact my wallet?”
After reading this article you will be able to interpret the impact on your wallet when you hear,
Today crude is trading at $96 per barrel.
Emotions drive decisions
Gasoline markets are influenced by emotions, speculation, and forecasting. People get uneasy when wars break out, pipeline distribution is disrupted, or foreign governments change their policies. The result is that emotions like fear and anxiety enter the minds of the people in charge of pulling the pricing levers that drive the daily price of crude oil.
Crude oil price changes foreshadow upcoming gasoline price changes
Crude oil price changes serve as an early detection system for where the price of a gallon of gasoline may be headed next. Sometimes when crude oil prices increase, convenience retailers will preemptively raise their retail gasoline prices in anticipation of their future wholesale cost increasing.
They are proactively changing their retail price of gasoline in advance of their costs actually changing.
How much is Crude trading at today? See NYMEX current trading value of a barrel of Crude Oil.
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 the Alaskan pipeline, big giant storage tanks like you see near airports 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 (all of the costs thus far in the lifecycle)
- Pipeline transportation fees
- Terminal fees (the giant storage tanks, taxes, fees, etc.)
See NYMEX current pricing for a gallon of finished Gasoline (RBOB).
Cost of Gallon of Gasoline when it leaves the terminal: $3.309.
Gasoline delivery fees
Once the hauling provider (trucking delivery company) picks up the load of gasoline to be delivered to the convenience store, the meter starts ticking. The transportation cost is calculated based on the number of miles it has to be driven or transported for delivery. Therefore, the longer the distance the gasoline has to be driven, the more delivery charges impact the price of a gallon of gasoline.
Estimate $.003 per gallon added to the price.
Delivery charges are a major reason that gasoline will cost more in a small town far away from a big city center. Terminal locations tend to be near larger population centers. As a result, small towns in rural Iowa maybe receiving supply from a bigger city like Des Moines, IA. The result to our wallet is we will pay more for a gallon of gasoline in a small rural town than in a big city.
Cost of Gallon of Gasoline with delivery fees added $3.312
Convenience retailers choose which terminal they buy from
It is very common for convenience retailers to purchase from multiple terminal suppliers. We as consumers might buy a gallon of milk from our favorite grocery store every week, but if a competing grocery store offers a discount, we happily buy from them. The same rings true for convenience retailers when they are shopping from which terminal supplier to buy gasoline. The caveat to this fair market system is that if you operate a Shell-branded or BP-branded convenience retail store, you have to buy your supply from Shell or BP. Part of their franchise arrangement is they are obligated to buy Shell gasoline if they are going to fly a Shell logo on their canopy.
Figuring out actual selling cost is tough
Retail Gasoline is priced in real-time based on the most amount of information available.
It is rare that a convenience retailer has real-time actual product cost. Do you remember those word problems from middle school where you had to determine the answer to a question like “How many cookies does Johnny still have?”
Johnny had three cookies. Sarah had four. Sam ate two. Pedro borrowed two from Sarah.
It may be a bad example, but a convenience retailer has to solve a riddle like this every day to determine their true product cost. The reason it is a riddle is because their technology systems are not sophisticated enough to track every single gallon.
Here is an example:
6,000 gallons were delivered on Monday. Your estimated total cost is $3.867 x gallon. You had 2,000 gallons already in the tank that you bought last Monday @$3.657 x gallon. You sold 1,200 gallons since last Monday. Today, you have 6,800 gallons.
You sell Premium at $.38 x gallon higher profit, Mid-grade is $.18 x gallon higher profit and you give $.10 away on every gallon if someone buys a car wash.
Hopefully, my imperfect examples give you insight into the types of challenges that complicate a convenience retailer’s ability to have real-time cost calculations. Generally, they reconcile these challenges with a blended average cost and call that “good enough”. At the end of the week or month, their account departments provide a settlement statement reconciling costs and profits on gallons sold. Detailed financial reconciliation requires register transactions, invoices from suppliers, and loyalty discounts.
Taxes are fixed fees based on the county, state, and township where the convenience retail store is located. Both Federal and State taxes are contained within tax charges.
Estimate $.219 per gallon added for taxes.
Cost of Gallon of Gasoline with taxes added $3.531
Surcharges and Credit Card Fees
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 $.0109 per gallon added for surcharges
Credit Card companies charge retailers for the processing of each transaction.
When you and I use our credit card, the convenience store operator has to pay a percentage 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).
Example $.14 per gallon added for Credit Card Fees
Cost of Gallon of Gasoline with surcharges and Credit Card fees added is $3.6819
Total Cost of a Gallon of Gasoline
|Base + Transport||3.309|
|Price x Gallon||3.999|
Gross Margin Profit
All of that to make $.32 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.
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.
The average convenience store operator is making less than $4.76 on a $60 fill up.