It is hoped that consumers will work with us to let our elected representatives in Washington know that they hold the key to resolving this very serious problem.

Everyone is upset about the high cost of gasoline and many of us vent our frustrations on the service station or convenience store where we fill up. While it is only natural to be angry over the ever-increasing cost of gasoline, it is also important to understand the complex reasons for this volatile marketplace.

The State Journal

It is hoped that consumers will work with us to let our elected representatives in Washington know that they hold the key to resolving this very serious problem.
Story By Jan Vineyard

Everyone is upset about the high cost of gasoline and many of us vent our frustrations on the service station or convenience store where we fill up. While it is only natural to be angry over the ever-increasing cost of gasoline, it is also important to understand the complex reasons for this volatile marketplace.

Retailers Make Very Little Money Selling Gas

You would think that gasoline retailers must be "raking it in" with prices for gas escalating on a weekly basis, but the reality is something completely different. Here are the facts regarding retailers and gasoline revenues:

On average, retailers made about $60 per day at the pump in 2007. That's it. That is based on retail gross margins of around 14 cents/gallon and between 12 cents and 13 cents in expenses. That leaves about 1.5 cents in profit. According to the National Association of Convenience Stores, the average retailer last year sold 119,000 gallons per month, or about 4,000 gallons per day at an average profit of 1.5 cents per gallon. Today, margins are even lower.
According to weekly information dated May 26, retail gross margins were 10.5 cents, and expenses were running 10.5 cents. That means that retailers are likely losing money on every gallon they sell. Quite simply, they have two tough choices: either keep gas margins at traditional levels and know they will lose customers if they are priced higher than the competition or eat margins to keep gas customers (and in-store customers).
If there are no gas customers, there are no in-store customers. Today, retailers cannot run their business on gas sales alone. While gas accounts for 72 percent of their sales, it is only a fraction of their profits. Five years ago (2003), gas accounted for 41 percent of profits.
Retailers Are not 'Big Oil'

Most stations sell branded gas, but they are not owned and operated by the major oil company. In fact, 56 percent of convenience stores selling gas are one-store operators, true Mom & Pop operations. It is estimated that only 2 percent of the convenience stores selling gas are owned and operated by a major oil company.

Credit Card Fees Are High

Credit card companies make twice as much profit as do convenience stores for all products sold in the stores. That means that the credit card companies took in twice as much at stores than the store owners themselves. When the price of gas goes up, the fees increase. Retailers are paying about 10 cents per gallon in fees when someone pays by credit today and, on average, more people (almost two-thirds of customers) are paying by plastic.

There Is a Liquidity Crisis

All of these pain points are made worse by tightened lines of credit for retailers. As painful as it is for consumers to pay the high prices to put 10 gallons in their tanks, retailers have to fill up 10,000-gallon tanks, and the cost of this inventory has doubled in the past three years. In the meantime, the banks have tightened lines of credit to honest businesses, and this is making it even tougher for retailers to stay in business.

What's the Solution?

Crude oil now represents about 72 percent of the retail price of gasoline -- higher than at any other time in history. If substantial inventories of additional crude oil were brought onto the market, basic economics tells us this would have a deflationary effect on crude oil prices. But perhaps even more importantly, such an increase in oil supply would send a signal to the non-commercial market traders.

Another significant factor influencing crude oil prices has been the entry of commodity investors seeking a safe haven from the volatility of the real estate and stock markets. This huge influx of capital has violated the traditional supply-demand equation and grossly inflated fuel prices. With additional supplies, it is conceivable that non-commercial investors would begin to transfer their speculative capital away from the crude oil commodities market and invest in markets with more favorable long-term economics.

Credit Card Fair Fee Act

The Credit Card Fair Fee Act (H.R. 5546) is critical legislation that could help reduce the financial burden facing retailers and provide them with the opportunity to remain competitive in the market. Many more retailers would be able to cover their expenses if they were not forced to turn over more than half of their gross fuel margin dollars to the credit card companies.

Some things can and should be done to ease the burden on consumers as well as the convenience stores and service stations that provide our fuel. It is hoped that consumers will work with us to let our elected representatives in Washington know that they hold the key to resolving this very serious problem.

Jan Vineyard is the executive director of the West Virginia Oil Marketers and Grocers Association. The group was organized to promote and improve the business interests of those engaged in the petroleum marketing, retail grocery and convenience store industries within West Virginia. It is headquartered in Charleston.