In the Gas Station Business, What Happens To Profits When Gas Price Hikes?

Being in the gas station business I know that if you are  like most of the 99% of our population then I am sure you do get frustrated seeing the gas price hike once again to a new high. Meaning you get less gasoline per dollar than before the price hike. Let’s say when the price was around 99 cents a gallon (around 2000 and before in most states), it used to cost me $17-$18 to fill up the tank. The same SUV now cost me around $75-$80 to fill up.

As an owner of a gas station business I will admit that I made more money per gallon when the price was 99cents a gallon than I do now when it is $3.59 a gallon. Why? Let’s do the math right here.

Most gas station business owners like us buy gasoline at “Rack” price, which is a published price set by the commodity stock market. Just like any stocks, gasoline also gets traded every day and the price can go up or down based on market demand and supply or the “future” of commodity pricetrading. But keep in mind that if you are in the gas station business, the rack price can also vary widely by your geographic location, as the supply and demand varies by location city and state.

Now let’s see how we come up with the retail gas price. When we buy gasoline for a gas station business at wholesale we pay the price of the actual gasoline and all the taxes that are imposed by various local, state and federal governments. Let’s take palm beach, fl for example, if the rack price for a gallon of gas cost $3.00 today, all taxes combined will be another $0.55 cents, than there is carrying cost to get the fuel to get delivered to a gas station, which usually runs around $0.15 cents to around $0.20 cents, than we have jobber markup (the wholesaler markup for selling the gasoline to a retailer) typically runs around 1cents to 2 cents.

Now let’s add all that up, 3.00+.55+.15+.02= $3.72 is what a gas station pays today for a gallon of gasoline so how much should he or she sell it for?

Typically we used to add 10 cents to our cost and sell but that has changed a long time ago, now usually there are “local price leaders” that sets the price in most areas. For example if you have a Race Track, Sam’s club, Costco or such low price leaders, the norm is others usually follow or stay closer to their price point. If a retailer does not follow or stay competitive, than eventually he or she will lose the business.

Let’s go little more in to this pricing game. Let’s say if you know gasoline is costing $3.72 today in Palm Beach but you noticed most retailers are selling for $3.85 or higher, are they making 13 cents or more each gallon? Answer is no way, as 85% of gasoline sold today are sold on credit cards, meaning the consumers pay for their gas via credit or debit cards instead of cash. This has a huge negative effect on retailers. On average most retailers pay around 1.75%-2% credit card processing and service fees to the card processing bank for each credit card charge.

Now let’s do the same math again, last time we calculated retailers were making 13 cents a gallon, let’s deduct the credit card fees now. If each gallon retails for $3.85 than the credit card fees are 3.85X0.175 = 0.67 cents Now deduct the fees from the gross profit. 13 cents – 6.7 = $0.6.3 cents

As you can see, the profit even though seems high but after paying everything, it is not really much to look forward to. Below are 3 other hidden costs that are associated with selling gasoline:

Since gasoline is highly flammable it is required in most states to carry big insurance coverage, many local and state permits which has high yearly renewal fees, not to mention gasoline dispenser and other related equipment break down can get very expensive to fix as only handful of repair vendors are authorize to work on them.

In my opinion after years of gas station business experience, I much rather have a gas station or a convenience store without gasoline than with, as it is a two way sword, and most times it cuts into the net profit than adding.

Let me know your thoughts on this topic of owning and running a gas station business, feel free to post any questions below.