The past few months have been an economic whirlwind, with record inflation and soaring prices at the pump.
When fuel prices hit record highs in early summer, Biden and Bezos publicly questioned whether fuel retailers could ease the pressure on consumers by cutting markups at the pump. And even though gas prices are starting to drop, about half of the states are still seeing gas prices above $4.00.
It’s understandable that consumers are hungry for relief at the pump and quietly wondering if fuel retailers are making record profits and if they could do more to bring prices down faster.
However, after analyzing the weekly moving average profit margin of 30,000 gas stations across the country, our data shows that fuel retailers aren’t the bad guys.
Right now, fuel retailers are just trying to maintain their business, not grow it. Asking fuel retailers to artificially reduce brand prices is asking them to sacrifice their business.
A common misconception about gas stations is that they are all owned by big companies that can suffer big losses. You might see BP, Shell or Mobil signs, but in reality half of them are small businesses, called ‘independent dealers’, and they are at the mercy of the market. These retailers rely on daily profit margins, which are extremely thin.
Gasoline retailers receive a fraction of the price listed on the sign – their net profit per gallon is around $0.03 to $0.07 – after factoring in costs such as labor, utilities, insurance and credit card transaction fees. This puts a gas station’s net profit margin at less than two percent. For reference, the banking sector has around 30% net profit margins.
Like all industries, the retail fuels industry regularly goes through periods of high and low margins. When fuel retailers are in a higher margin environment, it is to recoup their losses over periods of lower (or negative) profit margins.
When we benchmarked US gas station gross profit margins between 2020 and 2022, we found instances where margins were so thin that retailers were selling at a loss. COVID-19 lockdowns caused demand to plummet in 2020, then again in the second half of 2021, when COVID-19 variants raised concerns about fuel demand.
Another misconception is that the price of the sign – how much consumers pay at the pump – and how much gas stations earn are closely correlated. In fact, as prices increase, resorts generally earn less, which is very stressful for them. Any trader selling goods whose underlying prices change daily finds it difficult to manage their business. As prices change in oil markets, it’s stressful not only for consumers but also for fuel retailers. Everyone likes when things are stable.
Finally, it is not in a fuel retailer’s interest to keep brand prices high. Consumers have a lot of choice when it comes to refueling and lack loyalty because of it. The typical American fuel retailer has at least one competing gas station just 0.016 miles away and at least 1.5 stations within a half-mile radius. In addition to fierce competition, gas stations also have to get consumers to show up at the pumps. The rising data shows gas stations selling four percent less gasoline than a year ago.
Margins have started to revert to the mean and sign prices are following as the market begins to balance out. Future prices will depend on how consumer fuel demand changes (caused by something like a deep recession) and refiner capacity (caused by something like the end of Russia’s war in Ukraine).
In 2022, most retailers aren’t greedy, they’re trying to keep their business going. When it comes to mitigating the inflationary pressures induced by the fuel sector, artificially lowering the price of the brand is not the lever that will do the most good.
Alex Kinnier is the co-founder and CEO of Upside. He has years of experience leading product development teams at Opower, Google and Procter & Gamble. Shell and BP are Upside partners.
The opinions expressed in Fortune.com comments are solely the opinions of their authors and do not reflect the opinions and beliefs of Fortune.
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