Aug 11, 2022 (Baystreet.ca via COMTEX) -- About a month ago, American consumers were confronted with the highest retail gas prices in history when gas prices soared past $5 per gallon for the first time ever. Not surprisingly, Americans were treated to another round of political bluster and ivory tower jousting, with Republican lawmakers blaming President Biden and his energy policies while Democrats rolled out new bills, investigations, and even sent letters to the heads of oil companies accusing them of price gouging. "Profit margins well above normal being passed directly onto American families are not acceptable," President Joe Biden declared as he called on congress to suspend gas tax for at least three months.
However, former Treasury Secretary Larry Summers hit back against those calls, calling the idea of price gouging at the pump "dangerous nonsense" and warning that anti-gouging legislation could lead to shortages. "The 'price gouging at the pump' stuff ... is to economic science what President Trump's remarks about disinfectant in your veins were to medical science," he said.
Whereas gas prices have dropped by more than a dollar per gallon from their July peak, roughly half of states are still paying gas prices above $4.00. No doubt some consumers [and politicians] eager for relief at the pump will continue suggesting that slashing those ''fat'' mark-ups is the answer to lower gas prices.
However, the reality of the American fuel retailing business is very different from what some politicians have been portraying.
Fuel Retailing In America
The United States is home to roughly 9,000 independent oil producers, each of which, including the majors, sells crude oil into a global market at the prevailing price. The country is also dotted with 145,000 gas stations that independently set pump prices based on wholesale costs of gasoline plus a host of other local competitive factors.
Only 0.4% of all gas stations are owned by oil producers, with the vast majority being small independent businesses operating under a licensing agreement, hence the famous BP /zigman2/quotes/207305210/composite BP -0.11% , Shell /zigman2/quotes/205095589/composite SHEL -0.69% or ExxonMobil /zigman2/quotes/204455864/composite XOM +0.16% and Chevron /zigman2/quotes/205871374/composite CVX +0.47% signage. The cost of crude oil makes up roughly 55% of the price consumers pay at the pump, while the remainder is made up of an assortment of costs, including taxes, refining costs, distribution costs, and only then, profits for the retailer.
But here's the kicker: gas station profit margins are typically very low, in the range of 1-2%. Compare that to nearly 40% profit margin by gas pipeline transportation companies and over 40% for private equities and hedge funds.
"Basically nobody's vertically integrated anymore. The big oil companies got out of retail a long time ago. There's hardly any profit so why stay in the industry?" Patrick De Haan, head of petroleum analysis at GasBuddy has told Courthouse News Service.
A recent check by Upside on 30,000 gas stations in the U.S. found that on average, gas retailers' net profit per gallon is around $0.03-$0.07- after factoring in costs like labor, utilities, insurance, and credit card transaction fees. This works out to a net profit margin of less than 2%. Gas stations profit primarily from the products they sell inside - the convenience store assortment.
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