Oil producers are gushing profits. Refiners are doing just fine. But these days, the corner gas station is running on fumes.
You’re probably thinking: Hold on, how are gas stations not raking it in when I practically have to take out a loan just to fill up my RAV4?
When oil prices spike, retailers often try to hold onto customers by not passing on all of their higher fuel costs. They opt to make less money on each gallon they sell. The hope is that they can recoup those losses if crude prices later retreat, and they can lower the pump price more slowly than their costs decline.
In Massachusetts, the average price of regular gas has soared more than 40 percent this year to a record $4.73 a gallon on Thursday, data from the US Energy Information Administration and AAA show.
After expenses, gas stations are making between 5 cents and 10 cents a gallon, according to owners and industry analysts, down from a more normal range of 20 cents to 30 cents.
That adds up to a profit of 50 cents to $1 on the typical purchase of 10 gallons. In other words, these days selling about $50 worth of gas can yield a station as little as $1 in profit for the station.
“Someone in the supply chain is making money with gas at these prices, but it’s not the retailer,” said Dave Ellard, who owns two Mobil-branded stations, in Attleboro and North Attleborough.
To understand the harsh economic reality for tens of thousands of small operators like Ellard, here are five things to keep in mind about the gas station business.
1. There’s more to gas prices than the cost of crude oil.
By the time you start filling your tank, the fuel has made a long journey: from oil field to refinery to storage tanks to pipelines, tankers, barges, and trucks, and the gas station’s underground storage units. At several stops along the way, the price is marked up.
Here’s the most recent breakdown by the US Energy Information Administration, using the national average price for regular of $4.22 a gallon in March.
- Cost of crude oil: 58.7 percent of the total price, or $2.48 a gallon. Oil has accounted for between 50 and 60 percent of the cost of gas since the start of 2017 with just a few exceptions, most notably 2020, when crude prices plunged due to COVID lockdowns.
- Refiner’s markup: 17.5 percent, or 74 cents a gallon
- State and federal taxes: 11.7 percent, or 49 cents a gallon
- Marketing and distribution costs: 12.1 percent, or 51 cents a gallon
Marketing and distribution costs include the gas station’s markup.
Drilling down deeper, some expenses, such as wages and credit card fees, don’t differ widely for retailers in the same area. Other costs depend on a company’s size, whether it owns or leases its locations, brands sold, terms of its wholesale fuel contract, competition in the area, and business model, said Jeff Lenard, a vice president at the National Association of Convenience Stores, a trade group.
For that reason, profit after expenses varies a lot among gas station owners.
2. It’s all about the slushies.
For decades, owning a gas station has made financial sense mostly when it’s paired with a higher-margin business such as a convenience store, car wash, or repair shop.
Even then, large chains like Cumberland Farms or 7-Eleven have a distinct advantage over many smaller players, thanks to their marketing muscle and economies of scale. Almost 60 percent of gas station owners have just one location, while about 20 percent operate more than 200 outlets, according to the national convenience store trade group.
Sanjay Patel ran package stores in California before relocating to Massachusetts in 1998. That’s when he decided to get into gasoline, too.
“Gas stations are a good way to get people into the store,” said Patel, who has Gulf stations in Danvers and Mattapoisett, and a Citgo station in Raynham. “They want to do the one-stop shop.”
Profit margins inside the convenience store (known in the business as the “backcourt”) are 20 to 30 percent, significantly higher than at the pumps (the “forecourt”), according to Jeff Lenard, a vice president at the National Association of Convenience Stores. That’s why many owners try to keep their gas prices as close to the competition’s as possible.
“If you are 10 cents higher, you’ve not only lost your gas customer but your convenience store customer, too,” Lenard said.
Each of Ellard’s Mobil locations features a car wash.
“That is what I consider my main business,” he said. Customers can buy a wash at the pump, he said, “and I can offer a significant discount on the gas.”
And the “synergies” don’t stop there: His Attleboro operation also includes a Valvoline oil-change shop and a car-detailing business.
3. There’s only so much spending money to go around.
When consumers have to spend significantly more on gas, a necessity, they buy fewer drinks or snacks in the convenience store or wash their cars less often. That puts added pressure on owners to protect their more profitable “backcourt” business by keeping pump prices as low as they can bear.
Also, as prices rise, customers pay more with credit and debit cards than with cash. Those transactions are expensive for the gas station: about 2.75 percent of the purchase. At Patel’s Gulf and Citgo stations, customers are paying cash just 5 percent of the time, down from 25 percent when gas was in the $2 range in 2020.
“You know who’s making money? The banks,” said John Howell, co-executive director of the New England Service Station & Auto Repair Association.
4. Competition is fierce.
“You don’t want to be the highest price on the street.”
It’s a common refrain among gas station owners, attesting to the fact that drivers are extremely price conscious. In a survey taken earlier this year, two-thirds of respondents said that they would drive an extra five minutes to save 5 cents a gallon on gas, according to Lenard, the convenience store trade group executive.
Each day gas station owners have to walk a line between the price they’ll be paying for their next delivery and what their nearest direct competitors are charging.
Depending on their business, “Some stations get two or three shipments a week. Some get one a week, and some get three a day,” Lenard said. “When prices go up, there’s a reluctance to pass on full increase. “Everyone is playing a game of chicken to hold on to customers.”
5. Global forces drive local prices.
The price you pay for gas is driven by daily changes in crude oil supply and demand — and expectations for supply and demand — around the world. The US benchmark for oil has spiked more than 50 percent this year, to nearly $112 a barrel, after breaching $130 a barrel in March. The reasons: restricted OPEC production, rising demand, and sanctions against Russia, a major supplier, for its invasion of Ukraine.
Hope for relief hinges on how the Ukraine crisis plays out. If the European Union goes ahead with a threat to ban Russian oil, then prices won’t come down any time soon.
“This is the most challenging summer to predict prices,” said Patrick De Haan, head of petroleum analysis at Gas Buddy. “It’s sanctions-dependent. There is a good chance we stay well north of $4 [a gallon] through the summer and into the fall unless there is an economic slowdown.”
That’s good news for Big Oil. It’s bad news for a small operator like Dave Ellard.
“Most gas stations are just trying to break even,” he said. “Meanwhile, customers are looking at you like you are Mobil, because you are in their eyes.”