The Truth About Gas Prices and Gas Boycotts

The price of gas is on the rise and it's projected to go even higher by the end of the month, and I'm sure by summer it'll be high again. This is usually the time of year a bunch of people pass around Facebook statuses and e-mails urging for boycotts of gas, or chiding gas stations for their high prices and alleged "price gouging". And they're always wrong.

As many of you know, my uncle and father co-own a gas station, and have so for about 30 years. Their father owned a station before them, as did their grandfather. You could say gasoline is in my blood, but not literally, obviously, because then I'd be some sort of fossil-fuel cyborg, or dead. Anyhow, I've had many lengthy conversations with my dad about this topic and so I feel like I can speak on these topics, at least enough to write a blog post a handful of people might read.

Disclaimer: While my family does own a gas station, my comments in this post are my own, that I have made on my own free will and from my own independent research on the web. They've had no input in this post, directly. The only input is the fact that I've been around the industry my entire life. It's also very possible that my explanation of jobbers/wholesalers/refineries is slightly off.

I'll first cover the price of gas. When it goes up, it hurts all of us that drive, and it raises the costs of the products you buy because of increased shipping costs. What you may not realize is that it hurts independent gas station owners, too.

Generally speaking, all gasoline is exactly the same gasoline coming from the same tanker. Shell gas is the same as Exxon is the same as that random place on the corner. After the gasoline has been refined, it goes to the wholesaler and depending on what brand it's supposed to become, additives will be added like Chevron's nonsensical Techron. There are two "types" of gasoline -- branded and unbranded. Branded is when you see Shell or Chevron or whatever on the building, even if it's not a Chevron station, it may say "Chevron fuels". Unbranded gasoline is when you pull up to the gas station and you see no fuel brand. Most independent stations are like this. Places like Discount Zone are a widely seen example. Unbranded gasoline could very well be branded gasoline, but not being sold under the brand name, since the wholesaler sells a variety of gasoline and, as I mentioned, it's all basically the same. So that mom-and-pop gas station (or, in my case: uncle-and-pop) could be selling the exact same fuel as Shell or Chevron or Exxon, just without their proprietary additives.

Now, the big oil companies set their prices for crude oil (the raw, unprocessed stuff from wells), and then the refineries (sometimes owned by the same oil company) process it and create the different grades and types of gasoline and diesel. (Fun fact! Mid-grade gasoline is usually a blend of regular and premium, blended at the fuel dispenser at the gas station). After the refinery processes the fuel, the wholesaler purchases tanks of the various fuels. There may be another guy around this stage called a jobber or distributor. These will be smaller companies that buy gas wholesale and deliver it to the stations, as opposed to the stations buying directly from a wholesaler. The only way that's feasible though is if your station can sell enough gasoline to warrant buying wholesale.

So, okay, now that you have a general idea of the life cycle of gasoline, you can sort of see where pricing gets confusing. First, you have the oil company that has the crude oil. They set their price per barrel. Then, the refinery sets their price of the processed fuels, taking into account the energy and manpower used to create the fuel. Then, the wholesaler buys it from the refinery and increases the cost so they can make a profit. Then, if there's a jobber, they tack on their profit margin on top of the wholesaler's price per gallon.

Then, once the jobber or wholesaler has delivered the gasoline to the gas station and it's in the ground and ready to be sold to you, the gas station owner has to increase the price per gallon so that he/she can make a profit. Here's where a lot of misinformation happens.

The price you see on the sign at a gas station is the actual price you pay, including all state, local, and federal taxes. This is different than most price signs you see in the US. So, when you pay $3.50/gal, the taxes are included. Imagine if that $799 TV you bought had the taxes included in the price -- you'd see $871 on the price tag instead. Not as enticing, eh?

(All prices below are hypothetical, based loosely on current gas prices)

So, after the initial cost from the wholesaler or jobber, and then the taxes added in, the price per gallon (before being sold to you) may be around $3.35, $3.40/gallon. That means that $3.50/gallon gas you just bought? That gave the gas station owner a profit of 10 cents/gallon. But wait! Did you pay with a credit card? If so, the credit card company charges a flat 10/cent per transaction fee, negating that profit for one gallon. Then, depending on the credit card company your card is with, the station is hit with another 1-3% of the entire purchase fee. Let's say you put 15 gallons in your car and spent $52.64 on your fuel. The profit for the station is about $1.50, minus the $0.10 transaction fee, and then minus the 3% fee ($1.58). So that's $1.50 - $0.10 = $1.40 - $1.57 = -$0.17.

Yep -- that gas station just lost $0.17 cents from you buying gas. Now, that may not seem like a lot, but when you consider that means they aren't making a profit, how can they stay afloat?

Now, this is nothing new -- this is unfortunately the stress of the industry. However, to combat this tight profit margin, gas stations generally employ some other method of profits -- snacks, drinks, and cigarettes and other items in the store. The gasoline was just to get you to the store. The real money has always been in the convenience and impulse buys in the store. However, now that most people pay with a credit card at the "pump" (technically it's a fuel dispenser -- the pump is under ground), they never step foot inside, cutting down profits of impulse items.

Sales on impulse items generally decrease even more when the price of gas goes up. If you just dropped $50 on a tank of gas, chances are you'll hold off on that $2 soft drink.

There's a status on Facebook floating around from gas price tracking website Gas Buddy that says "I don't need a TV at the gas pump. I'd rather see your price 10c/gal lower." This shows a huge amount of ignorance on their part. If you're a gas station owner and your cost on gasoline is around $3.40/gal and you're selling it for $3.59/gal, your profit is $0.19/gal. A 10 cent drop in gas price would be $0.09/gal profit. No one can maintain a business at that level. The TVs in the pumps are generally a non-factor in costs of fuel, often provided by the fuel dispenser company or oil brand, or paid for through the advertising shown on the TV. Now, the majority of pumps with TVs are in gas stations owned by the oil companies, and in that case, their profit margins are significantly larger than independently-owned gas stations, though, they're still not that much better. And the advertisements on the TVs pay for them still.

What's interesting thing about the price of oil is that it's not priced based off of current conditions -- it's based off of what might happen in the future. These are called "oil futures". Basically, market analysts look at things to see if oil might be short in the future. So, today, you're not paying for what it costs to produce gasoline today; you're paying what it might cost to produce gasoline in the next few years.

Also interesting to note is that wholesalers change their prices daily and send those prices to the stations. The price of gas literally changes every day. Now, the station owner has to make a judgement call. If his price of gas goes up 2 cents and he's currently making 18 cents/gallon, he might eat that increase and you never see the price change at the pump, even though his cost went up and he's now making 2 cents/gal less. Then the next day, the price may drop 3 cents, bring his profit up to 19 cents, but you're still paying the same price at the pump. The reason is that after losing 2 cents for every gallon the day before, that extra penny helps make that up. More often than not (especially when there's another station nearby) gas station owners don't increase the price at the pump when their costs go up, at least not until it's increased consistently over a few days, or had a significant increase in one day.

This article from CNN Money has a great story that explains why gas makes big jumps sometimes.

"We were losing 20 cents a gallon," Good said. On top of that, like Bellman, credit card fees were stripping out another 4 cents to 5 cents per gallon.

Still, he didn't rush to raise his prices. "In Indiana, no one wants to be the first to raise their prices because the competition for customers is so tough," Good said. "You raise your price first and you lose your customers."

But when someone does pull the trigger, then consumers get whammed with a big jump in prices all at once because everyone else follows suit, Good said. He finally raised prices by 35 cents over the last week and a half after his competitors made the first move.

So, basically, owners eat the rising costs for a while until someone nearby cracks and pushes their price up (or the loss is too great for too long), then everyone pushes the price up by however much they were losing.

Now that you are armed with the knowledge of where gasoline comes from and how much money station owners make, we can tackle the idea of "gas-outs" or boycotting the purchase of gasoline to send a message to the oil companies.

Firstly, we need to establish the effectiveness of a boycott. Boycotts on non-essential items with an obvious competitor can work. For instance, let's say you wanted to boycott Apple products. It's not an essential item, so not buying an iPhone is an easy thing to do, and, if you want to send them a bigger message, you can purchase say, a Samsung device without contributing to Apple's profits at all. Of course, this would only work if HUGE numbers of people took part in the boycott. But let's pretend, for a moment, that 10 million people took part in this boycott. Apple may take notice.

Now, let's look at boycotting a necessity like gasoline. Firstly, boycotting an entire industry is tougher. You can't go buy gasoline from a competitor because you're trying to send a message to the whole industry. Secondly, you need fuel. Whether you drive a car, take a cab, or take a bus, you're using fuel. At some point, you're going to have to fill up your car, or you have a 2 ton paperweight in your driveway. Boycotting gas on a specific day will send not one iota of a message to oil companies. Here's why:

Let's say 10 million people plan to not buy gas on April 15th to send a message to the oil companies what could happen if they don't lower prices. A few hundred thousand people would start to get low on fuel around April 8th and they'll fill up their car because it's not April 15th yet. Maybe a million people fill up on April 13th because they're low and it's not the 15th yet. Maybe 3 million fill up on the 14th because they're running low on gas and know they shouldn't buy gas on the 15th. Then, on April 15th, you've got maybe 5 million people not buying gas on April 15th. Of those 5 million, most probably wouldn't have bought gas on that day anyway because of how their driving goes. Let's be conservative and say 1 million of those people. That leaves the oil companies with fewer than 4 million people not buying gas on a specific day. According to the US Bureau of Transportation Statistics, as of 2009, there are over 246 million passenger vehicles on the road in the US. That means way more than 4 million people did buy gas on April 15th. Even if half of those people bought gas (123 million), it's still 30 times as many people than those that didn't buy gas. 

Not to mention the fact that on April 16th, 17th, 18th, and 19th, all the people that truly took part in the gasout will have to go and fill up their cars.

The oil companies lost zero dollars. Not a single message was sent to them. This would be like if to save money on your electricity bill this month, you unplugged 2 lamps in your house for a month. And then the following month you plugged them back in and used them like normal. You saved yourself no money at all. You merely shifted the money.

The only true way a message would be sent to oil companies would be if of those 246 million vehicles on the road, 123 million were decommissioned and replaced with pure electric vehicles. That is the only way the oil companies could even begin to see a drop in profits.

Secondly, boycotting gasoline merely hurts independent gas station owners, if anyone at all. 

So, before you freak out about gas stations setting their prices too high, remember, they're as low as they possibly can be given the costs per gallon given to them. And don't boycott. It doesn't work.

Update! My dad chimed in and added this:

75% to 85% of all service stations are breaking the law by selling gasoline at too low of a price. Louisiana law requires a minimum markup of 6%.