Who’s Really Making Money from High Gas Prices?

How much profit would you say a gas station makes on each gallon of gas it sells?

25%? 20%? 15%?

Try 4 percent. That’s right, a typical gas station grosses about 4%, or between $.12 and $.14 per gallon with gas at $3.45 per gallon. That’s gross profit, so after subtracting payroll costs, rent, and credit card fees there’s not much left. No, the real money in owning a gas station is in the alcohol and cigarette sales.

But with gas at an all-time high someone has to be making buckets of cash, right? And indeed, someone is. Exxon Mobil recently made history by posting the highest quarterly and annual profit of any U.S. company…ever. To the tune of $1,300 per second for an entire year. I’m a capitalist, but this makes me ill. [Update: Read the comments for why these numbers might be misleading and why perhaps I shouldn’t feel ill.]

One interesting side effect: with scooters hovering around 100 mpg, sales are up 200% in the U.S.

[tags]gasoline, exxon mobil, scooters[/tags]

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11 comments ↓

#1 Danimal on 05.15.08 at 10:12 am

Rob,

The profit margin for oil companies is lower than almost every other business in the US. They’re making something like 8% ROI. Hardly seems excessive. The oil companies make less per gallon on gas than the US government does from the gas tax.

#2 Jeff on 05.15.08 at 10:21 am

And the only way to fight back against high oil prices?

Buy stock in ExxonMobile!

#3 Sam on 05.15.08 at 10:41 am

Yes, true. Gas stations themselves make very little profit on gas. Most of their profit comes from in-store sales of other products.

But as Rob said, Oil companies don’t make a very high percentage profit, either.

If you really are a dyed-in-the wool capitalist, why does this make you sick?

#4 Dan on 05.15.08 at 10:50 am

Also the price of gas is rising due to the lower value of the dollar. Demand and supply are roughly unchanged.

The price of oil is set to the dollar, so prices have risen.

Gas prices in Europe have not changed as dramatically as ours as the Euro continues to be strong against the dollar.

#5 Rob on 05.15.08 at 10:55 am

@Sam – Good point, I’m probably not the “dyed-in-the wool capitalist” I think I am if it makes me ill.

#6 orcmid on 05.15.08 at 11:17 am

I think this is one of those things where the margin doesn’t tell the whole story. For gas, it is all about turnover and cash flow. Even though the margin is small, the turnover at the pump is very high and the game is controlling inventory and watching fixed costs.

Supermarkets work the same way, doing quite well on small margins, very tight inventory controls, and integrated supply-chain. (Having a convenience store at the station is actually more of the same, even though the margins can be higher, and non-competitive because of the convenience factor. But it takes more investment and attention to operations too, seems to me.)

I also think that focusing on the profits of oil companies is a misdirection with regard to petroleum dependency. It is as if we think nationalizing the oil companies as non-profits would somehow remove the problem. (And removing the gasoline taxes is the wrong feedback signal, too.)

#7 Tyler Watson on 05.15.08 at 12:24 pm

Rising prices don’t bother me so much if they were simply cases of changes in supply and demand. My concern is the growing profit margin from the price increase that seems disproportionate to the increase in consumer costs. I don’t understand why increases in crude prices should lead to increase in profits. Maybe someone could help me understand this. From my armchair, it looks like the oil companies are not only passing on their costs to consumers, but are also reaping greater rewards.

The scooter statistic is interesting. I heard one analyst say that a possible backlash from increased fuel efficiency and movement away from fossil fuels will be even higher gasoline prices because the oil companies will try to protect their profit margins. That seems to fly in the face of supply and demand determining price.

#8 Jonathan on 05.15.08 at 3:59 pm

@Rob:
Much of gasoline’s high price stems from the inability to build refineries, which are the choke point in the production of gasoline in the US. Although the price of crude oil is high, the price the public is willing to pay is even higher. With no ability to turn more crude into gasoline, especially in the short term, the public bids up the price of gas until the very finite supply isn’t overly demanded.

This post by Megan McArdle is an excellent overview of supply and demand in the gasoline market:
http://meganmcardle.theatlantic.com/archives/2008/05/price_elasticity_of_gasoline_a.php

It also discusses why the proposals by two of the presidential candidates to temporarily repeal the gas tax are entirely futile. If the public is willing to pay $3.50/gallon of gas, the result of lowering the gas tax will be for refineries and gas stations to capture that money, not the public.

@Tyler:
The rising price of crude only contributes to oil company profits to the extent that they bought futures at a lower price. The majority of their profit increases come from the increasing demand for gasoline over the last twenty years while refinery capacity has been decreasing:
http://www.csmonitor.com/2005/0921/p11s02-usec.html

The link to Megan McArdle’s blog above best demonstrates the reason oil companies have been so profitable. Once demand reaches the end of the supply curve, prices continue to go up but no new supply can come online. There’s no additional cost to oil companies, thus the soaring profits.

#9 Mike on 06.06.08 at 2:16 am

So where did the money go? Who are pocketing the money?

How much does each party make from the $4.33 a gallon in CA?

. OPEC or non-OPEC oil producing countries %?
. Oil companies %?
. Refineries %?
. Oil commodity traders %?
. Gas stations %? 4%?
. Who else?

U.S. refineries have limited capacity, that leads to gas price jump within U.S and within regions like CA.

But oil commodity price has increased from I still remember $26 to $130 a barrel. No, the exchange rate didn’t change that drastically. No, the demand of oil in China grows 7.5% a year and India grows 5% a year and the world demand grows 2.5% in 2008. To me, the $130 a barrel price just doesn’t add up.

Oil producing countries don’t produce enough, and the traders keep on bidding up the price, so my assumption is the oil producing countries and traders are pocketing most of the money.

If the oil companies are currently paying the low cost of oil which the price is protected by long term contract signed years ago, and yet they charge much higher price to the consumers, they would pocket the price differences – that would be big money and big profit.

#10 Louis on 06.09.08 at 4:49 pm

Rob, I share your frustration. I consider those profitting from the miseary of the vast majority of our citizens as enemies of the state and we all would like to know who our enemies are.
I also blame Bush ( i refuse to call him president ). He alone has done more to weaken the dollar than any one in the history of our nation. That to me is unpatriotic!

#11 Shawn on 10.18.09 at 9:32 am

Gas station owner do not make even $0.10per gallon any more. It is pretty much half of that. Credit card companys/Banks make more than $0.10 per gallon. This how, business owner pays 2 % plus $0.20 per to visa/MC and 3% to Discover and American express card every time a customer uses a credit card. So if customer pump 10 gallons @ 2.49/gal; 2% plus $0.20 goes to credit card , total of $0.70 from gas station owner to credit card . These days credit card/ banks make more money than gas station. I see a lot of closed Gas station in Pa, Money for selling gas barely pay electric bill for owners.
A store with $3000 monthy rent, still has ~ $12000 monthly expenses and it is very defficult to make any money for gas station owner.