5 Key Elements of Fuel Pricing Strategy You Should Know

Fuel or Gasoline part of your business has many moving parts, and even being in this business for many years some of us still do not have a clear understanding of what rack price is, what jobber markup is, what and how crude oil pricing effect us or what pool margin is and how all these 5 key elements play a huge role in determining what and how much we can make by selling fuel. It is almost like a game of Russian roulette, a slight wrong move you can be upside down.

So today I want to clarify and simplify all those components of fuel and everything that is associated with this part of our business.

On a broader look it is essentially the same as any other business, you buy the product (in this case fuel) at a wholesale cost then sell them at a retail cost where you get to keep your profit margin like you do on cigarettes, or soda or candy bars.

But when dealing with fuel it is not that simple, when you buy a case of 20 oz coke, you can look at the invoice and figure out okay I paid $1.05 for each bottle so if I sell them at $1.49 I will make 29% gross profit right, but when it comes to fuel how do you know what you are actually paying? You may say we all get price notification from our jobber or suppliers every day. Fine but is that the price you are paying? Have you checked? No, I am not hinting that your suppliers are playing a game here no they are not, but they are adding a few pennies to each gallon depending on few things:

1. Dealer-Jobber agreement
2. Fuel carrying cost
3. Demurrage fees
4. Fuel surcharge imposed by your carrier and not your jobber.
5. Credit card fees

Now let’s talk about 5 important elements of fuel that effects our pricing and profitability, we all hear these terms but some of us still are little confused as to what they all mean and stand for.

1. Crude oil price

Crude oil is a commodity that gets traded daily on the New York mercantile exchange with the rest of the commodities like heating oil to Soybean. Crude is what we get from either going deep under the sea or under the ground. But there are two kinds of crude, light sweet crude, and regular crude. Generally speaking, the oil that comes from the Middle East is usually the light sweet crude. The difference between the two simply is, the light sweet kind is easier to process and refine into gasoline where the regular kind has to go through more process to get the same result so essentially they cost more to refine compare to light sweet crude. It is a great idea to keep an eye on the crude price daily, this way you can always forecast where the rack price will be heading in next 2-3 days. So you will actually be able to make a smarter buying decision and save some money. There are plenty of apps out there that you can download from your app stores that tracks crude prices and most of these apss are free.

2. Rack Price

Rack price is essentially the wholesale price that varies day to day and relies on the traded price of the crude in a broader way. So if the crude goes up today, you may see your wholesale or rack price will rise the next day. Mostly because of simple supply and demand factor. But who sets the rack price? As is aid rack price is the selling price from refiners to the wholesalers. Now the way most refiners figure out the price is by the price of crude for each barrel which has roughly 42 gallons of fuel, then add their expenses and a set profit margin and thus they will have a set rack price. Now a refinery in Louisiana may post for a gallon of gas at say $2 the same fuel from an Ohio refiners may post $2.02 so not all refiners charge the same as their cost also vary widely depending on again many factors. But in one city or locality all Exxon or BP or Shell branded fuel should have same or very similar rack pricing as most of them are getting their fuel from one refinery.

3. Jobber markup

Typically we all have to go through a wholesaler to buy our fuel, but unlike other wholesaler, fuel wholesalers will not add a profit percentage on top of the rack price. Instead, they will charge you certain penny or pennies each gallon to sell you that fuel. Typically it is around a penny for most of us but I have seen it as high as 4-5 pennies added to the rack by some jobbers. It all depends on what you negotiated the deal when you signed up with your jobber. So it is a good idea to review that agreement at some point to make sure you know what you are paying. Once you know what you are paying it will be easier for you to figure out how much you are making by selling fuel.

4. Net cost

By now I am sure you figured out that fuel pricing or cost is very volatile, it goes up and down often. Now to figure out the exact cost of each gallon you buy each time you get a delivery, you have to really calculate each time, because of the fluctuations of some of the associated cost like I mentioned earlier. So once you get a load of fuel delivered, look at your bill of lading, make sure you did get the actual gallons it says you did, and then look at the invoice and make sure they charged you the rack price that was sent you that day. Then look at the bottom part of your invoice and add the other cost, but remember one thing every gallon of gas has many different taxes added to them, but no worry one thing is set, and that is tax, so know your tax totals, like in my area i always 40 cents to each gallon to get the true cost. Now other than tax you have to add the carrying cost again this is what may vary load to load, also check and see if there are any fuel surcharge added to your invoice, then if the driver had to wait in the terminal then you will another charge for that.

Once you add all of those charges you get to your true and actual cost per gallon.

 

5. Pool margin

Pool margin simply put the combined profit you make after deducting all the expenses.

Sounds simple enough? But in reality it is not. See we all sell 3 0r 4 grades of fuel in our store and all of them cost differently, so there are some calculation that need to be done to find your exact composite pool margin. But again if you want to keep things simple you can calculate your regular unleaded fuel first and see where you stand on that grade since that is the bulk of our fuel sales anyway.

Say you bought 8000 gallon regular fuel today and after adding all the cost you found each gallon cost you say $2 you then survey your areas and see what other retailers are posting at, and then you decide to stay around their pricing and price yourself at $2.12, so in this case your gross profit on each gallon of regular is 12 cents, but it is like said gross, not net, now you need to figure out what your credit card fees are each gallon and deduct that then you get the net cost. So in this case say your network charges you average of 2% credit card fees, so if each gallon sells for $2.12, then your credit card fees for each gallon is 2.12x.02 = 4 cents roughly. So if every customer bought gas from you by using their credit card, you would net 12 cents – 4cents =8 cents. So your net pool margin is 8 cents in this case for the regular grade gasoline. You can calculate all other grades this way also and then take an average of all 3 or 4 grades that you sell and do an average to get your average net pool margin.

4 Things to remember when calculating fuel cost:

 

1. If your station sells all three gasoline meaning you sell regular, plus or the mid-grade and premium, or super fuel chances are you only but two grades of gasoline, regular and premium and not mid grade. Why? Because in 15 years or so most gas stations got newer dispensers where each dispenser has a blender in them. Meaning your dispensers blend the regular and premium and make the mid grade. Mid-grade is essentially the mix of regular and premium fuel at the ratio of 70:30 meaning it mixes 70% regular fuel with 30% premium fuel, and thus we make mid grade. So when calculating cost and profit for mid grade can be little tricky.
2. Diesel fuel is taxed at a different rate than motor fuel. On road low sulfur diesel is generally taxed at a higher rate than say motor fuel or off-road diesel fuel. So when you calculate cost and profit on diesel make sure to take the extra tax into consideration.
3. A typical fuel carrying truck hold about 8500 gallons of fuel, but say when you ordered your fuel you only ordered 6000 gallons of fuel, your cost per gallon will go higher because typically a fuel carrier will charge you for the full load and not a partial load. So say if you bought 8500 gallons the carrying cost was $175 if you break it down to each gallon than you paid little over 2 pennies on each gallon. Now that you only bought 6000 gallons and still paying the same $175 carrying a cost, your cost just jumped by another penny, and now you paid 3 cents a gallon and not 2. Make sure to keep an eye on this issue.
4. Gross gallon VS. Net gallon. Take a look at your bill of lading, it will have both of these items, and typically the gross will be little higher than the net gallons. Summer time the difference rises and in winter it drops. It is because how fuel or gasoline is being measured. Gallon is a measure that is by the volume and not by the weight, so in summer the warm temperatures can make the fuel volume rise or increase and thus the gross will go higher than net and vice versa.

It is always a good idea to know where your pool margins are at each fuel load you buy, not only for your profit calculation but for accounting purposes too.

Just to recap the 5 elements of fuel pricing that play the key role in determining what and how we could price fuel and how much we would make by selling that fuel are:

1. Crude Oil price
2. Rack Price
3. Jobber Markup
4. Net cost
5. Pool Margin

I once created an excel worksheet where I set it up to calculate the mid grade cost by having the 70:30 ratio. If you think you can use that excel sheet, and you do your bookkeeping in Microsoft Excel then do let me know, and I can forward you a copy of that.

You can simply do this by sign up for the newsletter at the bottom of this page and when you get your welcome email just hit reply and tell me you need the excel worksheet. I will be happy to pass it on to you.