Gas Stations (UPDATED)

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Hey, Zach here.

Just a quick note, gas stations was our very first episode of The Economics of Everyday Things, all the way back in January of 2023.

When we first published this, gas prices were coming off of a historic high of around $5 a gallon.

Today, the national average is back down to a little over $3 a gallon.

We've made a few updates to this story to bring it up to date.

All right, on we go.

We Americans just love our gasoline.

We use 376 million gallons of finished motor gas every day.

That's around 30 full tanks for every registered vehicle each year.

In many ways, Gas is the workhorse that drives our economy.

It gets us to the office, grocery stores, and shopping centers.

As much as we love gasoline, we also love to complain about how much it costs.

The price of gas tends to go up and down in cycles.

That's the result of a pretty complicated web of global market forces, seasonal patterns, and geopolitics.

When gas gets expensive, we all look for someone to blame.

Politicians, oil executives, foreign governments.

But the easiest target is the person who has to contend with disgruntled customers face to face, the gas station owner.

When you stand at the pump and watch the bill tick up, $10, $20, $50,

you may think that gas station owners are making out like bandits.

But is that really the case?

No, can I yell that any louder?

It's definitely not what people think.

For the Freakonomics Radio Network, this is the Economics of Everyday Things.

I'm Zachary Crockett.

Today, gas stations.

There are more than 150,000 gas stations in the U.S.

A lot of them have signs displaying the logo of one of the big oil companies.

But that doesn't always mean that the company owns the gas station.

Eight out of 10 gas stations in the U.S.

are actually run by independent operators.

They pay oil companies for the right to use their branding and gas.

Many of them came here from other countries, like Jitender P.

Seti.

I was born and raised in New Delhi, India.

I came here 17 years old in 1976.

And two days after arrival, I was working at a sonic drive-in food joint in Jackson, Mississippi.

Seti eventually made his way out to San Jose, California, where a friend from India offered to sell him a gas station with a convenience store.

He didn't know much about the business, but he took a risk on it.

October 10th, 1980, I bought the store and I never looked back.

I named it Penny Saver, a convenience store with two fuel pumps.

I bought it for $80,000.

It wasn't easy.

Probably worked seven days a week, 14, 15 hours a day, sometime, and it was not the best location.

But I got the taste of the blood and never stopped.

Since then, SETI has owned more than 40 gas stations.

He's made good money, but the gas itself is something of a footnote.

You know, gas business is penny business.

We don't count dollars.

We count pennies per gallon.

How is that possible?

Well, the stations are at the very end of a long, complex, and expensive supply chain.

We get get the majority of our oil from our own domestic production, primarily in the Gulf Coast, Texas, New Mexico, North Dakota, Montana as well.

That's Garrett Golding.

He's the assistant vice president at the Federal Reserve Bank of Dallas, where he spends a lot of time thinking about oil and gas.

The oil company sells to the refiner.

The refiner is going to sell it to a distributor.

Distributor is going to sell it to the retail pump station or chain of stations.

Golding says that most of what we're paying at at the pump covers that very first step of the process, pulling that raw black stuff out of the ground in Texas or North Dakota.

Generally between 40 and 50% of your cost of gasoline is that cost of crude oil.

These percentages change quite a bit based on geopolitics, international trade, and a bunch of other factors.

But let's say you buy a $3 gallon of gas.

About $1.50 of that is the cost of crude.

You're paying around 50 cents or so for refining and another 50 cents in federal, state, and local taxes.

When all is said and done, the gas station owner only has around 40 or 50 cents left over.

And that has to cover fuel truck delivery charges, marketing, and a lot of other overhead costs.

You got maintenance, you got electric bill, you have repairs,

you got the rent you got to pay, and you got all kinds of liability, fire protection, protection, slip and falls.

So by the end of the day, they're averaging somewhere in the neighborhood of 7 cents a gallon of profit.

On average, a gas station sells roughly 4,000 gallons of gas every day.

At 7 cents per gallon, that's a daily profit of around $300.

So why don't gas station owners charge more for gas?

For starters, they have a lot of competition.

Stations are often clustered together.

And, well, the guy across the street doesn't always play nice.

I lowered 10 cents, and the guy competing with me lowered 20 cents.

So I lowered 10 more cents.

He goes under 20 cents, and he was making no money.

I said, okay, I'm not going to play this game.

So I went up 20 cents.

He went up 10 cents.

It happens all the time.

Do the station owners ever just walk across the street and say, like, hey, man, let's just keep it at $4.15 a gallon today?

You know, they're not supposed to, but many do.

And some don't.

Some hate each other.

And they compete like anything.

Station owners usually buy a few days' worth of gas at a time, which they store in underground tanks.

Once they load up, their costs are locked in for the next 48 to 72 hours.

But the price of wholesale gas changes every 24 hours.

If your competitor buys in at a lower cost, he might be able to undercut you.

So you have a choice to make.

You can lower your prices and maybe lose money on every gallon of gas you sell, or keep a little profit margin and watch your customers go across the street.

Ultimately, gas station owners are even more exposed to market fluctuations than their customers are.

You really don't have any leverage to negotiate.

The price is set per day, the crude price and the refiners,

they all set their prices.

Station owners tend to insulate their customers from the ups and downs of the oil market.

What that means is when crude prices go up, station owners are slow to pass on the extra cost to us at the pump.

And when prices fall, they don't pass along the savings right away either.

A station owner like SETI might keep his prices high for a while.

to make up for the bad times.

In the economics world, the energy nerds, we call this rockets and feathers, where the price of oil can go up like a rocket, but the price of gasoline comes down like a feather.

This is a frustrating thing for consumers to witness, but one way that I try to explain this is generally consumers are not getting the full price run up as it is running up, and they're paying for it on the way back down.

So, if gas isn't a big money maker, how do gas stations stay in business?

That's coming up.

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Gasoline is what draws customers in.

It's a commodity that people reliably need.

But for gas station owners, the core of the business isn't at the pump.

It's inside the store.

We are a gas station/slash convenience store.

We also have a takeout restaurant inside, so we try to be a one-stop shop.

That's Kai Trimble Lee.

She owns a BP gas station in Milwaukee, Wisconsin.

Since we spoke to her, She's started leasing it out to another operator.

She told us the bulk of the station's income came from selling food.

What kind of food?

Oh, you know, the bad stuff, but that's good stuff.

Pork chop sandwiches to beef polishes to wings to catfish to shrimp, po-boys, the corned beef sandwiches.

We got some magic going on.

Triple E operated her station more like a bodega than a gas station.

We sell a little bit of everything.

Milk, eggs, bread, fruit.

You go to the gas station, you get some gas, and you go get a water.

That's the business model.

You're definitely gonna see more profit in the convenience store and restaurant than I would do the gasoline.

At JP SETI stations, the margins are three to four times greater inside than out at the pump.

We always ran at about 33% gross profit inside the store.

Your cigarettes are maybe 15%,

your beer runs 25%,

Candies, 40%, 45%.

Coffee, 50%.

What are the highest grossing items for you?

I would love to sell you ice bags all day long.

Typical ice bag would sell you for $1.49.

Probably cost us 49 cents.

That's pretty good.

It's pretty darn good.

But when gas gets more expensive, that business model gets screwed up.

Many of these station owners, anytime we have a big price spike, they make make less money as prices go up than they do when prices go down or when they are low.

Here's what happens when oil prices go up.

Number one, that tight margin on gas gets squeezed even further.

Number two, people buy less gas, meaning station owners are doing less volume.

And number three, when people buy less gas, they're also buying less soda or bagged ice inside the store.

Now you're having to choose, do want two candy bars or just one candy bar?

Do you want 18 packs of beer or six pack of beer?

Higher gas prices also mean more problems outside at the pumps.

For starters, theft.

Most tanks are not locked because deliveries come at night.

So you got these people, they have three four hundred gallon plastic tank in their truck, pickup truck.

Two, three in the morning, pitch dark, they'll come with a hose, open your tank,

and they will take away three, four hundred gallon gas.

So you could lose a couple thousand dollars worth of gas in those two, three hours.

And those price wars between stations, well, they get worse too.

They are really in a cat and mouse game with each other on who raises prices slowest because as the pump prices go up, consumers are going to go to the station that is three cents cheaper.

But gas station owners face a bigger threat than the ebbs and flows of fuel prices.

Electric vehicles.

While EVs only make up less than 2% of all cars on the road, they now account for 10% of all new car sales.

And around half of American consumers say they would consider buying one in the future.

For station owners, installing EV chargers involves ripping up pavement and laying down cables.

And beyond the construction costs, the hardware and software can run upwards of $50,000 for a single charger.

The billion-dollar question here for the service station owners is how aggressive do you get with investment in something that is going to take a few years to really have a broad customer base.

There is an incentive for making that investment.

It usually takes at least 20 to 30 minutes to charge an electric vehicle with a fast charger, which means more time for customers to buy things inside the store.

Gas station chains with massive stores along freeways like Bucky's and Sheets are building out EV infrastructure more aggressively.

But many of your run-of-the-mill neighborhood gas stations are waiting to suss things out.

Right now, it's not very lucrative to have those chargers, but I know many people who are building new gas stations are putting the infrastructure in underground so when the time comes, they can switch.

All things considered, running a gas station can be a tough business.

Owners have to contend with a lot of things that are out of their control, whether it's the global supply chain of oil or the shifting tides of the automobile markets.

But there's at least one silver lining, as JP Seti discovers when his own car is running low.

I usually go to my own store, pay my own gas.

That must be nice.

At least I can make 30 cents a gallon.

For the economics of everyday things, I'm Zachary Crockett.

This episode was produced by me and Sarah Lilly and mixed by Jeremy Johnston.

We had help from Daniel Moritz Rapison.

You know what?

I don't have any gas station friends.

I'm going to have to go make some gas station friends.

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