Pricing at the Gas Pump

What are the cost components of a Gasoline retailer? How is the $3.50 we pay gets allocated? An amazingly well written article on gasoline retailer pricing models is available at the National Association of Convenience Stores (NCAS) website. The article gives a clear explanation, rooted in economics, of why the prices at the pump reflect the current crude oil prices even though the retailer bought the current inventory at old prices.

A gasoline retailer typically seeks to establish a retail price based on the cost of replacing the gasoline currently at the retail location, not the cost of that product itself. Basing prices on "replacement costs" is especially critical when wholesale prices fluctuate frequently. A retailer must generate sufficient cash from its current retail sales to purchase its next delivery of gasoline; otherwise, the retailer would be constantly using debt to finance wholesale gasoline purchases.

Here is a broad cost structure of retail gasoline (source NPR), and California. Variable Costs (per gallon): Cost of Goods Sold Crude Oil: $2.50 (fluctuates daily, market prices, cost to refineries) Refiner Margin: $0.25 Distribution Margin: $0.07 Credit Card fee: 2% = $0.07 Federal tax: $0.184 State tax: $0.38 (varies state to state) Total: $3.479 The credit card fees are incurred at percentage of dollar amount. Master card charged 2%. Fixed Costs: Since the gas retailers usually have other services including convenience store, the fixed costs are part of the whole operation and not just gasoline sales. The fixed cost components are: Real estate Employees Maintenance So the contribution margin from a gallon of gas priced at $3.50 to the retailer is about less than 5 cents. That does not look like a considerable margin for the business.