How Much Does Gasoline Actually Cost?

Aaron McHugh

Who Makes All the Money On Selling Gas?

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.

How Much Does a Gallon of Gasoline Cost?

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.

Wild Cards

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
Delivery 0.030
Taxes 0.219
Surcharges 0.109
Additions 0.140
 Total costs 3.6819
 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.

14 thoughts on “How Much Does Gasoline Actually Cost?

  1. I knew the profit margin wasn’t much, but I didn’t know it was as low as $.12/gallon. Yikes.

    Yep, we’re diligently working on designing and selling software for a living. Actually thinking about a KickStarter project to move it along faster. Steve’s only been back to working full time for four days now, and it’s sucking the life out of all of us. It’s been hard to come off three months of an Epic Adventure and return to “normal.”

  2. 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.

  3. 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.

    1. 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.

  4. 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.

    1. 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.

    1. Keith-Looks like he made $40.3M. Here is a quick excerpt from a news article from the Dallas Morning News.

      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.

  5. I can tell you as a transporter of gasoline, we do not make 0.099 for delivery. It is more like 0.030 on the high end.

  6. Seems like the big ripoff is federal and state 22 cents a gallon tax.Now Michigan is talking about raising tax .45 cents that’s crazy.

  7. thanks for the breakdown…good stuff. As an engineer in the oil and gas pipeline and terminal business, I appreciate your presentation. One comment, I thin the overall tax number should be 0.50 to 0.60 if you add the federal tax to the equation.

  8. As a former project manager in the Air Force, I know that the basic cost of gasoline to the Government is significantly less than the cost of gasoline at the civilian pump. I understand the basic principle of buying a commodity in large quantities will result in lower cost per unit (a gallon of gasoline) and that the Federal Government doesn’t pay federal gas taxes. I also understand that the gasoline retailers have a very small margin. If inflation is added to the cost of each gallon of gasoline and the cost of labor is included, the cost of each gallon should not exceed $1.50. Please tell me from where the other cost comes! The clear answer is SPECULATION! And who benefits from that speculation? Ask your members of Congress. They know!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.