Why most gas stations don’t make money from selling gas
With gas prices climbing up, you may think station owners are getting greedy. But the economics behind the pump tell a different story
Photo from The Hustle
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By Zachary Crockett, The Hustle
Last month, gas prices hit a new national average record of $4.33/gallon, up nearly $1.50 from just a year ago.
The price of gas is largely to blame for America’s recent, 40-year-high inflation rate of 8.5%. Driven by up by covid-related supply chain issues and Russia’s invasion of Ukraine, it handily topped the list of consumer goods that saw the biggest year-over-year price bumps in 2022.
Bonus Facts about Gas Stations:
What’s up with that 9/10ths of a penny thing? Almost a century ago, when gas was just $0.15/gallon, the government levied a gas tax of a fraction of a cent. It’s irrelevant today, but station owners have kept it around because it makes prices look marginally better.
Explosions don’t just happen in the bathrooms. On average, ~4.2k fires break out at gas stations around the country each year, causing $30m in property damage. Most of them are caused by cars. A few are caused by hot dog machines.
Speaking of bathrooms… a nice toilet can drive a gas station’s sales. According to one survey, 22.6% of customers who use a bathroom report “frequently” making an impulse purchase on the way out. KFC started at a gas station. Colonel (Harland) Sanders whipped up his first fried chicken plate in the 1930s while running a gas station in North Corbin, Kentucky.
It’s easy to look at the gas pump right now and think that station owners are taking you for a ride.
But the business model of gas stations is a bit counterintuitive.
Most gas stations barely turn a profit on their core product — and when the price of oil goes up they may even take a loss on it.
Battling small margins, cutthroat competition, and the looming threat of electric vehicles, many gas stations are more reliant than ever on secondary revenue streams.
Who owns gas stations?
Looking at those big signs along the freeway — Shell, 76, Chevron, ExxonMobil — it may seem like gas stations are all owned by big oil companies.
In reality, the majority of owners are individual operators who only own a single station.
Franchisees who pay name-brand gas refineries royalties (anywhere from 3% to 14% of revenue) to use their branding
Independent operators who run generic “no-name” stations and buy gas on the open market
Most major oil companies have backed out of the retail business because selling gas generally isn’tvery profitable.
According to IBISWorld, gas stations make an average net margin of just 1.4%on their fuel.
That’s far lower than the 7.7% average across all industries — and ranks beneath other notoriously low margin businesses like grocery stores (2.5%) and car dealerships (3.2%).
To understand why let’s step back and take a look at the typical supply chain of gasoline.
The profit pipeline
Gasoline begins its journey as crude oil, largely sourced on home soil in states like Texas and North Dakota.
Once extracted from oil fields, this raw liquid is:
Sent to refineries to be processed into gasoline
Funneled via pipeline into bulk storage containers, and
Transported via freight trucks to gas stations, where it’s kept in 20k-gallon underground drums
By the time gas reaches the pump, the profit potential is pretty dismal.
Let’s say you buy one gallon of gas at your local station for $4.09 (the national average, as of April 13, 2022).
Here’s a rough breakdown of where that money goes:
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