Saturday, November 03, 2007

Gas stations don't like expensive gas anymore than you do

I regularly hear people assert that gas stations are taking it in by the fistfull as gas prices enter a period of steady price increases.

But the opposite is true. Retailer margins are razor thin in a time of rising prices. Consumer price sensitivity becomes heightened, as illustrated by local radio stations broadcasting live from the place with the cheapest gas in the city. Competitors trim margins to a few pennies on the gallon (which, at $3 a gallon, comes to a penny or so on the dollar).

When prices ebb, retailers are able to relax. As the price of refined gasoline drops, retail prices drop as well, but usually not as fast. Consumers are happy to see they're paying a dime less a gallon this week than they were the week before, not knowing (or seriously caring) that they might actually be paying twelve cents less than seven days ago, if only retailers would continue to cut margins to nothing.

And money spent on ultra-thin margin gas isn't spent on high margin stuff like fountain drinks and coffee.

3 comments:

undergroundman said...

You neglected to note that many (most?) of the gas stations in the US are vertically integrated with huge drilling and pipeline systems already in place. A few large firms share the marketplace -- the textbook definition of a monopoly. That doesn't mean that you don't have a point -- these gas stations do compete with independent gas stations -- but it does suggest that the truth is a little more complicated.

Audacious Epigone said...

UC,

You're approaching an area I get a lot of exposure to through my professional existence.

Less than 15% of gasoline retailers also extract and/or refine (vertically integrate), and that number has been shrinking every year for the last five. Of course, these corporately-owned retailers are subject to predatory pricing and anti-trust laws (although both of those are non-issues in the actual marketplace).

The biggest gasoline retailer in the US is 7-Eleven. Depending on location, the company buys off the pipeline or through a specified supplier. There is no vertical integration.

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