How does a gas station attendant know when and how to raise or lower their station’s prices? What is their process?



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    Retail stations’ prices are determined by what they pay their wholesalers. For company-owned stations, the wholesaler may be the same company, and they can control the wholesale price and thereby control the retail price, to some degree. (Note that no Exxon stations are company owned, and many other brand-name stations are not owned by the company whose brand they pay big bucks to advertise; they are privately owned franchises which may or may not buy their product from Exxon on whatever brand they are sold under).

    The wholesale price is what is paid to the refiner, plus costs of transportation and storage and wholesaler profit. In some cases, but not too many, the refiner may be the same company. More likely, an independent refiner produces gasoline from crude oil that they buy from all over, then they sell it to wholesalers all over.

    The price refiners pay for crude oil is essentially the “price of oil” plus transportation and other costs, plus profit.

    So a typical chain of sale might be: Oil is produced by the Angola National Oil company. It is bought by Valero, a US refining company (the largest one). Valero mixes that oil with oil from the US, Canada, Saudi Arabia, Mexico, Nigeria, and a dozen other sources to make gasoline of various blends. They sell that to wholesalers – maybe Conoco, or Koch, or some name you’ve never heard of. The wholesaler also buys from other refiners. They mix it all together and distribute it to their clients, which could be retail gas stations in Kentucky, Kansas, and Arizona.

    Ideally, a retail outlet will take the price they pay, add their costs, add the federal excise tax, add state and local taxes, and then determine an acceptable profit margin and add that. Usually these days retail outlets are doing really well if their profit is 10 cents a gallon, which on $4 gasoline is under 3%, an awful profit margin. Many retail gas stations use this low profit on gasoline as a loss leader; they count on sales of bottled water and twinkies etc. to make their money (such products in convenience stores typically carry a 100% to 200% or more profit margin.) When the price of oil gets too high, everyone all along the line (transporters, refiners, wholesalers, and retailers) will sometimes take a loss rather than destroy their market — this happened in the summer of 2008, when the average price in the US reached $4.11. It should have been over $5.00 if everyone had taken a reasonable profit. (I know few people will believe this, but it is the case.).

    When there is a lot of demand in the retail market, and when they also have adequate supplies, retailers will sometimes juggle prices some in a game to maximize both sales and revenue (which is the goal of all sales, of any product). Usually they are much more constrained and follow the price that comes to them from wholesalers within a few cents.

    In large cities with competitive markets, or even small towns, most stations will be priced within a close range. This is because, as prices get higher, customers seek lower prices. If Station X is selling gasoline for a lot less than its competitors – like 50 cents or more less – then everyone will go there, and Station X will run out of product quickly (they probably get their product from the same wholesaler as some or most of their competition). So it is in the interest of Station X to keep its product flowing, but not make a lot less profit (or more) than other stations. That’s why stations within a general area are typically similar in price. Exceptions will occur, when company owned stations are forced into a certain pricing and there is some other station whose wholesaler, for whatever reason, is selling at a noticeably different price. Such situations rarely last very long; the supply chain, from production through refining through wholesaling to retailing tends to blend the price as well as the product itself.

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