Sunday, 31 July 2005 19:00
Behind the Pumps
A Look Behind the Scenes at Gas Pricing
It’s no great secret that gasoline prices are on the rise. There are many factors that are driving these prices higher and there is every reason to believe that the increases could continue. So who is to blame? Why are some gasoline dealers pricing so much lower than others? What can you do about it?
It would be easy to applaud those dealers offering lower prices and have contempt for those with a much higher price, but there are many factors that affect price and in many cases, things are not as they appear.
First, gasoline dealers set prices based on a desired pool margin (profit margin) expressed in cents per gallon. A typical gas station may seek a profit of no more than 10 to 12 cents per gallon, some higher some lower. So if you are paying $2.75 for a gallon of gas, that dealer may be making no more than 10 cents on that gallon, and usually much less if it is Regular gas.
Second, consider that regulations allow oil companies to charge different wholesale prices to dealers of the same brand. Oil companies can determine a market area (zone) and establish a wholesale price for that zone. In some cases, the zone can have just a few stations of that particular brand. The result for a dealer, and ultimately the consumer, is that the wholesale price can vary greatly, 4 - 6 – 8 cents per gallons, from stations of the same brand. So, one dealer of a particular brand posting a price 5 cents higher than another of the same brand may actually be making less profit per gallon.
Third, credit card fees are a major issue. Most fuel sales are now made on credit cards. Some stations have as much as 70% of their fuel sold on credit cards. For each credit card, the dealer can be charged about 2% to 2.5% of the price as a processing fee. When gas was $2.00 per gallon, this would eat up 4 to 5 cents of the profit per gallon. As it reaches $3.00 per gallon, it will eat up 6 to 7.5 cents per gallon. In some cases, this can virtually eliminate all of the profit on a gallon of gas.
Finally, consider that with each cost increase, it costs more and more for the dealer to keep inventory. For many dealers, much of the profit they have made is underground in fuel inventory. This can have a major impact on cash flow for the business.
So, what can you do to help fight the increasing cost of filling up? Here are just some suggestions:
o As prices continue to rise, get in the habit of filling up the night before. The day starts early for gas dealers and they will tend to learn of fuel cost changes early in the day and adjust prices accordingly. If because of market conditions or because strategic reserves are released, the price begins to drop, you should do the opposite. Wait for the mid-morning if possible to see if decreases are going to come through on the price.
o Because pricing occurs in zones, notice which areas tend to consistently lower and get in the habit of purchasing gas in those areas
o Don’t go way out of your way to get a better price. On 15 gallons of gas, a difference of 5 cents per gallon is only 75 cents. You can eat up that much gas just driving 5 miles out of your way (depending on what you are driving)
o Consider a gas credit card that will provide a rebate for a particular brand. This is generally a good practice if you pay the card off each month
As summer ends, and the demand for gas tapers off, maybe some relief is in sight. The price of crude, weather in the gulf, and so many other issues will all be factors. I can’t predict what will happen to the price in the months ahead. However, I can suggest that the corner gas dealer will be as happy as you are to see prices come down.
July 2005 Eldersburg Business Report - The Truth About Small Business Financing
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