High profit margins on gasoline are costing drivers more

Rick Newman

Rick Newman·Senior Columnist Tue, July 25, 2023, 4:18 PM EDTIn this article: 

The price of oil is the biggest factor in gasoline prices. But another factor has been pushing fuel costs higher for the last three years: gas station profit margins.

New research by economist Michael Havlin shows that the profit margin on gasoline is about 77% higher than in May 2019, the first month for which government data is available. Compared with February 2020 —the last month before the COVID pandemic erupted — gasoline margins are 62% higher. The latest numbers are for May 2023.

Last December, gasoline profit margins peaked at 120% above the 2019 baseline, or 102% above the 2020 pre-COVID level. The profit margin on gas was about 6.7% in 2019, so at current levels, it’s close to 12%.

At the current average price of $3.64 per gallon, about 43 cents per gallon goes to the retailer as gross profit. Were the 2019 margins still in place, drivers would be paying just 24 cents per gallon in profit. For a 10-gallon fill-up, the added cost is $1.90. For somebody driving 12,000 miles a year who averages 25 miles per gallon, the added cost would be about $91 per year.

The real-world difference is greater, because gas prices were lower in 2019 and 2020. In May 2019, for instance, gas prices were around $2.95. So the 6.7% margin represented a cost of about 20 cents per gallon to consumers. In February 2020, prices were slightly lower while margins were slightly higher, with the margin costing consumers about 18.6 cents per gallon. Since higher prices mean the dollar value of a marginal profit goes up, higher prices raise the profit margin buyers pay in dollars.

Are gas stations ripping off drivers?

It’s not as simple as it might seem. “Greedflation” does seem to be a real phenomenon, with some businesses cashing in on their ability to keep prices high. Havlin did research earlier this year, for instance, showing that higher markups at car dealerships have been a major contributor to automobile inflation. A January study by the Federal Reserve Bank of Kansas City found that many firms increased their markups because they anticipated higher costs, contributing substantially to inflation.

But not all businesses have the ability to keep prices high, and other factors besides greed contribute to pricing power.

Gross profit margins, simply put, are the difference between the wholesale price retailers pay and the price they charge consumers. For gasoline, wholesale and retail prices broadly move in the same direction. But they don’t always move by the same amount, and there are lags. Some consumers who follow the wholesale price of gasoline have been frustrated to see that when the wholesale price declines, retailers don’t always pass all the cost savings on to consumers.

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“Retailers tend to hold back price increases, but when prices decline, they tend to hold back decreases and gain margin,” Jeff Lenard, a vice president at the National Association of Convenience Stores, told Yahoo Finance. When prices are volatile, as they have been, a drop in the price of oil gives gas stations a chance to boost profits by keeping the retail price up for as long as they can. Stable prices would provide fewer ups and downs to take advantage of.

Lenard also said consumers are becoming slightly less sensitive to gas prices relative to other reasons they choose a gas station. Better food options in the store, for instance, might draw shoppers less concerned about the cost of gas.

Demand and supply also affect retailers’ pricing power. Demand has been fairly strong since COVID vaccines became available and lockdowns ended in 2021. The United States has also lost refining capacity since 2020, which can create a bit of a bottleneck for gasoline supply even when oil prices are low. Overall, a solid economy and a ceiling on refining capacity have kept the gasoline market fairly tight. If demand softened — which is possible if the economy slumps — supply would build, and gas stations might have to cut profit margins or risk losing sales to competitors.

The COVID pandemic massively disrupted supply chains and spending patterns, and those kinks still aren’t fully ironed out. “As much as people like to drag on retailers, one of the challenges with inflation has been ultra-low inventories,” Havlin said. “A lot of those inventory shortages originate up the supply chain. It’s easy to blame dealerships or gas stations, but profit margins across economy are not likely to come down until inventories go up.”

In time, maybe.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.

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