Profits at the pump

NPR recently had an item, on their All Things Considered program, about gasoline prices and how gas stations make money. The title, “Gas Stations Profit from More Than Just Gas”, is a bit misleading, because the report actually tells us that the gas stations are often not making their profit from the gas, but relying mostly on other things.

I'd seen an article a couple of years ago that said that, but here's a current analysis of the numbers:

On a recent weekday, van der Valk was selling unleaded regular for $3.45 per gallon. Most of that money goes to the wholesaler. Van der Valk's own share is 12 cents to 14 cents. Of that, he pays about 4 cents in payroll expenses, 4 cents in rent, and another 4 cents in credit card fees. Credit card fees paid by gas stations have increased sharply in recent years, as more drivers use plastic to postpone the pain of high gasoline prices.

Subtracting those expenses, there isn't a lot of profit left outside at the gas pumps. The real money for gasoline retailers is inside, at the refrigerator case.

Cigarettes, the report goes on to tell us, are the biggest-selling items, and bottled water brings in the most profit:

“You tend to make at least 50 to 60 percent on a bottle of water,” van der Valk says. “Water is more profitable than gasoline.”

Which explains, of course, why few gas stations exist any more without convenience stores, car washes, and the like attached to them. (It also explains why companies are eager to bottle water and sell it, but not why suckers consumers are eager to buy it.)

The report also points out that the station owners actually do best when the price of gas falls. When the prices go up, they raise the price just enough to cover it — any more, and customers will go elsewhere, where it's cheaper. But when prices go down, they can lower the price a little less, at least for a day or two, adding an extra penny or two per gallon to their very low profit on the gasoline.

Of course, NPR's report is showing us what's happening at the gas stations. We need to remember that, while the local merchant has to sell bottled water to keep his business afloat, ExxonMobil announced record profits for the first quarter of 2007, and Shell is quite happy as well. One reason for that is the prices the station owners are paying for the name-brand fuel, as opposed to what they have to, um, shell out (sorry) for “unbranded” product:

Unlike the Shell station on Ventura Boulevard, van der Valk's Simi Valley location is a so-called “unbranded” station: Instead of buying exclusively from a Shell wholesaler at a Shell-dictated price, van der Valk can shop around for the cheapest gas available. At the moment, the wholesale cost he is paying for this station is about 15 cents a gallon below the Shell station's. Ironically, the gas is coming from the same refinery.

“Think about that. And my margin over here is 30 cents a gallon. My margin at the Shell is 12 cents a gallon. So it's more than double,” van der Valk says.

More than double. That's the cost of putting the Shell name above his pumps. And consumers flock to the name-brand stations, convinced that they're getting “better gas”; I see that whenever I pass the local gas stations, where the name-brand stations are often selling their product for 5 or 10 cents per gallon higher, and sometimes even more. I'll repeat something that's in the quote above, that “the gas is coming from the same refinery.”

And this is from ExxonMobil's first-quarter report:

ExxonMobil's first quarter net income was $9,280 million, up 10% from the first quarter of 2006. Higher refining, marketing and chemical margins were partly offset by a decrease in crude oil and natural gas realizations.

In the first quarter, ExxonMobil continued to actively invest, bringing additional crude oil, finished products and natural gas to market. Spending on capital and exploration projects totaled $4.3 billion in the first quarter.

The Corporation distributed a total of $8.8 billion to shareholders in the first quarter through dividends of $1.8 billion and share purchases to reduce shares outstanding of $7.0 billion, an increase of 26% versus the first quarter of 2006.

No, they don't have to sell bottled water.