Fuel prices have been rising for a couple of years, and this past summer’s high cost was frustrating for almost everybody. Who profits, and why is the price so high? How does a gas station make money? How many steps are involved in getting oil from the ground, turning it into fuel, and putting it in your tank? It is more complicated than you might think.
First, oil has to be found and removed from the earth. Drills, pipes, pumps, lots of metal, and heavy labor. Every part of that carries a very high cost that is passed along to the customer. After the oil is pumped from underground, it is transported by ship, rail, or pipeline to a refinery. Crude oil is typically not useful on its own, except perhaps as a marine fuel for oil-burning turbine engines. Oil must be refined into something useful, so it gets heated in fractional distillation towers and separated into various grades and viscosities. This is just one step in how gaseous fuels, liquid fuels, lubricants, and asphalt base are created. In one of life’s ironies, it takes a lot of fuel to heat the fractional distillation process. It takes fuel to make fuel, so it takes money to make money.
After fractional distillation, products are stored in huge tanks of different types. Propane and Butane are the lightest products from the process due to their gaseous nature, and must be kept in pressurized containers. This is where many people’s home heat comes from in the winter. Where I live, rural gas stations also sell and deliver propane in addition to heating oil and gasoline at the pump. Storage of bulk products is about 5 percent of the cost of the fuel you purchase. Tanks cost a lot of money, and they don’t maintain themselves. The total cost of extracting and refining crude oil is about half of what you pay at the pump, primarily because of the large amounts of land and massive equipment required for the job.
There are also a lot of people in the industry. Oilfield and refinery workers must be very physically fit, and their work schedules are demanding. Many employees work for weeks without time off. To attract people to that kind of life, salaries are high. The physical demands of the job are intense. When I worked in construction, many of my coworkers were former oilfield workers, and their constant refrain was that construction was easy compared to oil work, as nothing in the oilfield weighed less than 80 pounds. A lot of oilfield workers do not stay in the industry for more than two to five years, making some money and then finding another livelihood elsewhere.
While oil-extracting and refining companies make quite a bit of profit on their products, a big portion of the profit is in the transportation industry. I have hauled gasoline and diesel to retail stations as a truck driver, and the company I worked for seemed to take the majority of the after-refining profits. Trucks and tanker trailers aren’t cheap, but It goes beyond the cost of equipment and paying the driver.
In order to get fuel to the gas station, somebody must purchase the fuel from the refinery. The refinery has depots or “racks” where fuel is provided to transportation companies. The transportation company buys fuel from the rack, and retains the “rights” to that fuel. Typically, the individual gas stations never own the fuel, but make a commission on its sale. The fuel is provided in advance as a rotating, interest-free loan from the transportation company to the gas station. Depending on the arrangement, that loan is in a 5-day, 7-day, or 10-day period. Have you ever run into a fuel shortage, or a gas station that was out of a certain product? That is because of the loan structure. Gas stations have zero incentive to keep a lot of product on hand. Their tanks are just large enough to hold fuel for 2 or 3 day’s sales, and no more. They do not want to keep fuel on hand longer than that, or they begin to owe interest on the fuel they have in the tank. When I was hauling fuel, there seemed to be no pre-scheduling. Gas stations would call the company’s dispatcher, complaining that they were nearly out of fuel and needed a truck as soon as possible. This was entirely due to the loan system.
The only stations that seem to be an exception to the loan system are larger, farm-oriented stations. These companies often transport their own fuel, meaning they do not use the rotating loan system and own the rights to their own fuel. The farm fuel and feed station near me has giant tanks and a small fleet of trucks, and they get their fuel directly from the refinery rack. For those of us who are preparedness-minded, knowing the nature of the gasoline business is of vital importance! If there is ever a crisis, normal demand for fuel increases rapidly. A station that has fuel on hand for 2-3 days of normal consumption could sell out in a matter of hours, with no hope of resupply! Keep some fuel on hand for your own use, and be aware of stations that look like they might use their own trucks to transport fuel, and have larger storage tanks.
Marginal Profitability: Selling Fuel
We all heard plenty about gas taxes in 2022, and fruitless talk of lowering or removing those taxes to ease the burden on the people. Taxes are paid on the fuel at the point of sale and collected by the gas station, even though they don’t make profit on this. Depending on the type of fuel, approximately 60 cents per gallon goes to taxes. After costs of extraction, refining, transportation, retention of fuel rights, and taxes, very little money is actually made by a gas station. At the stations I hauled to, my estimate was that they made perhaps 7 cents per gallon, or around 2% profit. At most, a station would make around 10 cents per gallon in profit. Urban gas stations in my work area were selling around 4,000 gallons of fuel per day. At a generous 10 cents per gallon, that created $400 or less of profit per day on fuel sales. Large chains may sell more, but that is barely enough to pay the salary of the staff. It doesn’t even begin to cover overhead expenses. Don’t blame the gas station for the high prices, since they aren’t benefitting from it. In fact, as high prices reduce fuel consumption, gas stations lose some of the little profit they make. Remember, their commission typically doesn’t increase when the price increases.
Now, I am sure that information has not made you feel any better about the price you are paying at the pump. The cost is the cost, and it hurts! So where can the average consumer save money? Where does the gas station make the money to keep the lights on? When you consider that the gas a station is selling is merely a service to get you in the door, the nature of the business becomes apparent.
High Profitability: Selling Junk Food
Gas stations usually bill themselves as “convenience stores.” When I was a kid, I always wondered why my parents did not buy sodas or snacks at a gas station while traveling. “Bring it along from home,” they said. Wise! Gas stations sell beer. They sell donuts. They sell hot food, and some even have a couple of tables like a restaurant. There are endless aisles of chips, candy bars, beef jerky, etc. All of these things are sold at inflated prices. I never thought much about it until I started hauling fuel to gas stations. Out of habit, I usually just swiped my card outside at the pump and drove off, never even walking inside.
When I took a job hauling fuel, even though I was already an experienced truck driver, I had to endure some weeks of on-the-job training. The guy I worked with during those weeks was an interesting fellow, and our lives were quite different. I watched him at work, and I started to notice that he bought food and drinks at a lot of the gas stations we went to. To me, that seemed crazy. “Bring lunch from home” was how I was raised, after all. I started noticing some of the prices. Some examples: A can of Pringles potato chips. At Walmart, that can is $1.49. At the gas station it was $3.99 or $4.99. That is a price difference of around 300%. Donuts? At Walmart, 6 donuts cost $3.00. At the gas station, donuts were $1.50 or $2.00 each. Again, an increase of 300% or more. Potato chips in 1-ounce or 2-ounce bags were the same price as 12-ounce bags at the grocery store. That is an appalling 600% increase. These increases were noticeable on every product throughout the convenience store, and at every place we went. Each gas station had its own selection of name-brand junk food, and variations of “homemade” food. Some chains sell pizza. I recall a saying from years ago, “Friends don’t let friends buy gas station pizza.”
After seeing how much all these items cost, I was amazed at how many of them my coworker was purchasing during the day. Secretly, I decided to write down a list with prices, and compare his lunch costs with mine. In one day, he bought two bottles of Gatorade, a bottle of Pepsi, a can of chewing tobacco, and a tiny sandwich that may have contained 300-400 calories. That doesn’t seem like much, but he paid a king’s ransom of $16.95 plus sales tax for those items. Not worth it! Meanwhile, I carried the same large bag of $2 grocery store potato chips all week, a canteen of lemon juice in water, and a couple bottles of flavored water that I got at the grocery store at 4-for-$1.00. My cost for the day was around $1.00, for a similar level of hydration and calorie value.
By now, the reason for my parents’ rule is abundantly clear. Buying anything other than fuel at a gas station is one of the worst rip-offs that you can experience. Unless you are going to pay with cash, don’t even bother to go inside. Don’t look at the candy and chips, don’t even think about it.
If you don’t already know where they are, look around for farm stores that might have bigger tanks, their own trucks, more reliable storage, and more stable prices. Your wallet will thank you, and you’ll be better prepared.