The High Cost of Selling Gasoline

Selling gasoline is a multi-billion dollar industry, but for local gas station owners, their livelihood can hang on a single penny.

According to the New York Times, in 2010, Exxon Mobil posted a profit margin of $30.46 billion, a staggering number considering the hardships most businesses are facing in today’s economic climate. Local gas station operators survive the erratic market by walking a tight rope, one of balancing prices, overhead and the danger of undervaluing their product.

For Frank Eberle, it’s a job he’s been juggling since 1980.

On Sunday, Eberle celebrated his 32^nd year as the owner and operator of the Sunoco on Quarterfield Road in Severn, and said as prices escalate , owners such as himself need to be more alert than ever. 

“This is a really crazy time. On one particular day, [wholesale prices] went up 17 cents,” Eberle said. On another occasion, the station owner said the market went up 25 cents, dropped 16 cents the next day and then another 10 cents the day after that.

“It’s just a seesaw. It’s what I do everyday.”

On average, Eberle purchases six loads of gas of about 8,700 gallons every month. An increase of 17 cents on the wholesale price, like the one last week, comes out to a $1,500 increase for the next load resulting in a potential increase of $9,000 for the month.

It’s that type of instability in the market that led Eberle to embrace the ideology of “pennies per gallon.”

“It’s not about the percentage, it’s about pennies,” he said. “A penny a gallon doesn’t seem like much, but it’s what you’re working towards.”

A penny saved is a penny earned

As a director of The Washington, Maryland, Delaware Service Station and Automotive Repair Association (WMDA), the 32-year veteran of the business began advocating for shop owners to stop lowering their prices for the sake of being cheaper than the competition.

Finding the right price to sell gas can make or break a station, Eberle said. A location that sells one million gallons per-year but sells its product for a penny less than it can afford, ultimately loses $10,000 by the end of the year.

Eberle said local station owners are handcuffed by several factors—mass marketing gas distributors like Costco, unstable market prices and credit card fees at the pump.

The strategy of pricing

Each day as oil is traded on the world’s markets, pricing for gasoline moves up and down, only to be steady for 24-hour periods of time, said Eberle. These prices affect the cost for retail dealers in terms of how much they pay for the fuel from distributors, also known as “jobbers.”

These distributors’ load their tankers at a terminal and pay the wholesale cost for gas, known as the “rack price.” It is this price that “jobbers” use to sell to station owners, plus additional fees.

“Each retail dealer has a supply agreement with their specific jobber and each agreement will have slightly different pricing matrices,” Eberle said. “Generally, the pricing is a simple ‘rack price plus’ plan that includes delivery and whatever the contract spelled out.”

After receiving the gas and paying the “rack price” plus additional fees to distributors, station owners must then determine a listed price for customers.

The catch, according to Eberle, is that the rack price fluctuation can cause significant profit hits and put owners at risk of not covering their operation bills.  

The local owner said he must add 8 cents per gallon to cover overhead alone, and that’s before he compensates for the 2.25 percent hit credit card fees take out of his profit margin. When the posted price is $4, it costs the dealer close to 10 cents per gallon, said Eberle.

“Around 80 to 85 percent of customers use credit cards. If I’m paying a rack price of $3.99 and charging $4.09,” like he did last week, “I’m losing money,” Eberle said.  “So many people use credit cards. It’s easy for me to spend $3,000 a month on fees."

When Eberle sets the posted price outside his Sunoco station, he first spends the early hours of the morning analyzing the rack prices, surveying the competition and doing the math down to a fraction of a penny.

“Every day, all day long, you’re looking at these little things,” said Eberle. “When you don’t, that’s when you see people with doors closed up.”

Staying afloat

“The prices [customers] pay for gasoline are not providing jumbo profits for the dealer,” Eberle said. “It is a pennies per gallon business.”

The instatement of convenience stores at gas stations is only a method to fund the establishment, Eberle said. What locations may lose by selling gas when crude oil prices increase, they hope to make up by providing auto maintenance services or selling soda pop, he said.

Places like Costco are able to sell fuel at such a low price because they’re making up the loss inside their mega-stores, Eberle said.

“For the dealer to be successful, additional profit centers must be employed to keep the doors open,” Eberle said.

“This not an easy business, the dealer has to be on his toes everyday.”