Gas Pricing Thought for the Day

Today I was working on a bid for a retail concession in a county park in California.  In these bids we usually promise a set percentage of sales as rent in exchange for the concession and use of certain fixed assets.  One of our standard clauses is to exempt gasoline sales (if there are any) from this rent calculation, because gas sales are so horribly low margin.  Considering the licensing, environmental, and safety issues, gasoline is always a money loser for us that we offer either a) because it is expected, as in the case at large marinas or b) because it gets people in the door to buy other stuff.  And I sell gas in rural areas where I have less price competition than in cities.

It is for this reason that I am always flabbergasted at how much time and attention the government and media tend to pay to retail gasoline pricing.  The portion of my business that is clearly the worst, most unprofitable piece, so much so I have to make special contract provisions for it, gets all the attention for price gouging.   It's like the FEC dedicating most of its labor to investigating Mike Gravel's campaign donations.  I mean, why bother, there's nothing there.

  • markm

    I think gas pricing gets such attention because it is a very fluid and efficient market - with prices posted publicly and changing every day - and this catches the attention of economic illiterates, which unfortunately includes most of the population...

  • Ivan

    What burns me is that the same people who complain about gas prices in the U.S. being too high and that the government needs to do something to fix it, will say in almost the same breath that we need to develop alternatives to petroleum. People fail to realize just how cheap gasoline really is relative to alternatives even when it is at $3/gallon and that increasing gasoline prices actually incentivize alternative fuel development.

    That said, I like to see a cogent explanation about how prices get set at the wholesale level. Back when Exxon Mobil had that last round of record profits when gas prices reached an all time high there was a lot of talk in the media about how the fix was in, but nobody could actually explain how one could get away with this without falling victim to ones competition. IOW, if Exxon Mobil was keeping prices artificially high, what was stopping BP from undercutting them at the pump and stealing their business. AFAIK, nobody ever produced any evidence of collusion, yet that was the implied conclusion.

  • What always got me was the fact that, on average, oil companies only make around $0.08 - $0.10 profit per dollar of gasoline. Guess how much the Government makes off of every dollar of gasoline? Depending on state tax levels, the Government can pull in around $0.25 - $0.50 of profit per dollar. What did they do to manufacture and distribute that gasoline? What did they do to provide that product to consumers? Nothing. But, they make much more in profit than the oil companies.