The last few months have been an economic whirlwind, with record-high inflation and soaring prices at the gas pump.
When fuel prices hit record highs earlier this summer, Biden and Bezos publicly argued about whether fuel retailers could alleviate the pressure on consumers by reducing markups at the pump. And even though gas prices are beginning to drop, roughly half of states are still experiencing gas prices above $4.00.
It’s understandable that consumers are eager for relief at the pump and might quietly wonder if fuel retailers are making record-high profits and whether they could be doing more to lower prices faster.
However, after analyzing 30,000 gas stations’ weekly rolling average profit margin across the country, our data shows that fuel retailers aren’t the bad guys.
Right now, fuel retailers are just trying to sustain their businesses, not grow them. Asking fuel retailers to artificially reduce sign prices is asking them to sacrifice their business.
A common misconception about gas stations is that they’re all owned by big corporations that can sustain big losses. You might see BP, Shell or Mobil signage, but in reality, half of them are small businesses, called “independent dealers,” and they’re at the mercy of the market. These retailers rely on daily profit margins, which are extremely thin.
Gas retailers receive a fraction of the price listed on the sign–their net profit per gallon is around $0.03-$0.07–after factoring in costs like labor, utilities, insurance, and credit card transaction fees. This puts the net profit margin of a gas station at less than two percent. For reference, the banking industry has roughly 30% net profit margins.
Like all industries, the retail fuels industry goes through regular high and low-margin periods. When fuel retailers are in a higher-margin environment, it is to recoup their losses from lower (or negative) profit margin times.
When we did a comparative analysis that looked at gross profit margin for U.S. gas stations between 2020 and 2022, we found cases when margins were so thin that retailers were selling at a loss. COVID-19 lockdowns cratered demand in 2020, and then again in the latter half of 2021, when COVID-19 variants caused concern over fuel demand.
Another misconception is that sign price—how much consumers pay at the pump—and how much gas stations earn are closely correlated. In fact, as prices rise, stations generally earn less, which is very stressful for them. Any merchant selling goods with underlying prices that move daily has difficulty managing its business. So as prices change in the oil markets, it’s stressful not only for consumers but also for the fuel retailers. Everybody likes it when things are stable.
Finally, it’s not in a fuel retailer’s interest to keep sign prices high. Consumers have a lot of choices when it is time to fill up and have little loyalty because of it. The typical U.S. fuel retailer has at least one competitive gas station only 0.016 miles away and at least 1.5 stations within a half-mile radius. In addition to the fierce competition, gas stations must also get consumers to show up at the pumps. Upside data shows that gas stations are selling four percent less gasoline than last year.
What’s next?
Margins have started coming back down to average, and sign prices are following as the market begins to equilibrate. Future prices will depend on shifts in consumers’ demand for fuel (brought on by something like a deep recession) and refiners’ capacity (brought on by something like an end to Russia’s war in Ukraine).
In 2022, most retailers aren’t being greedy–they are trying to sustain their business. When it comes to alleviating inflationary pressures brought on by the fuel sector, artificially lowering sign price is not the lever that will do the most good.
Alex Kinnier is the co-founder and CEO of Upside. He has years of experience leading product development teams at Opower, Google, and Procter & Gamble. Shell and BP are Upside partners.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not reflect the opinions and beliefs of Fortune.
More must-read commentary published by Fortune:
This story was originally featured on Fortune.com
Source: https://finance.yahoo.com/news/ve-analyzed-profit-margins-30-134200907.html