Economy · July 7, 2022

Leave gas station owners out

Over the Independence Day weekend, the Biden administration shifted the blame for rising prices, and specifically rising gasoline prices, from Vladimir Putin to gasoline dealers. Saturday 2 July at noon, President Biden’s Twitter account considered:

My message to the companies that run gas stations and set prices at the pump is simple: this is a time of war and global peril. Reduce the price you are charging the pump to reflect the cost you are paying for the product. And do it now.

As of July 1, 2022, the average gasoline price in the United States was $ 5.34 per gallon. This is down from the high of $ 5.47 per gallon reached two weeks ago, but it’s still a historically high level. On the New York Mercantile Exchange (NYME), gasoline futures prices rose 57% in 2022. Diesel recently surpassed $ 5.75 a gallon and now stands at $ 5.73 a gallon, the most expensive high of the last decades.

The biggest input factor for both gasoline and diesel is the price of oil, which has fallen slightly over the past month. The main reason for the decline in the prices of both oil and petroleum products is a growing build-up of economic data that suggests that a predicted recession may already be here. (The first calculation of the second quarter US GDP number will be released on July 28.) But despite recent price declines, West Texas Intermediate (WTI) remains up more than 37% in 2022, Brent Crude up 38%.

Both disinformation and disinformation are essential skills in politics, but under the pressure of rising inflation and slowing economic growth the current administration has extended the practice to new frontiers. The tweet, which was undoubtedly not written by the President but to which he has lent his name, begins with a direct save to “companies that run gas stations”.

In fact, of the approximately 145,000 filling stations in the United States, less than 5 percent (7,250) are owned by refineries that, as the president puts it, “set the prices.” But even that small number of gas stations are ultimately not setting the price of gasoline. Prices derived for the first time from world oil markets, to which the decisions of the Organization of the Petroleum Exporting Countries (OPEC) are an important contributor, are the main factor.

In addition, over 60% of retail outlets are establishments owned by a family or individual. And while the number has undoubtedly changed over the past decade, 2013 census data reported that 61% of those stations are owned by immigrants. Thus the Democratic administration that daily inveighs against billionaires and “big companies” has directly targeted the “mom & pop” shops, thus attacking newcomers in the United States, on which it is clear that the left and most of the Democrats Parties stake their political future.

While the current moment is one of “war and global peril,” it is a matter of opinion how closely tied US interests are to one of the fighters in Southeast Europe. If the danger is indeed to be avoided, adopting a much more neutral stance than having tens of billions of taxpayer dollars and lethal weapons shipped 5,000 miles would be a wiser approach.

But it is by admonishing gas station owners to lower their prices that deep ignorance, dishonesty, or both is exposed.

Indeed, even at current prices, most gas stations make a pittance, or even lose money, by selling only gasoline. According to IBISWorld, while the average U.S. business has a profit margin of just under 8% (7.7%), the average gas station borders on less than a quarter of that: 1.4%. At $ 5.34 per gallon, the national average price of gasoline over the Independence Day weekend, a 1.7 percent profit would have come to $ 0.09 cents per gallon.

The Hustle estimates that after overheads (labor, utilities, insurance, credit card transaction fees, and so on), a gas station owner receives in the order of five to seven cents per gallon. Even selling a few thousand gallons of gasoline a day would only generate a few hundred free and clear dollars for the owner. Franchise City estimates that the $ 50 spent at the gas pump goes

$ 30.75 to the oil company, $ 7.00 to the refineries, $ 4.00 to the delivery company, $ 1.25 on processing and transaction fees, and finally at the end of the chain you get $ 1.00. And that number can and does change – sometimes even lower – most owners suggest an average [profit] 1 to 3 net cents per gallon.

Meanwhile, the federal gasoline tax of $ 0.18 cents per gallon produces a risk-free, unearned commission in Washington of 3.4 percent per gallon. That’s double what risk-carrying entrepreneurs receive, most of whom are small business owners and a substantial portion of whom are immigrants. And that doesn’t take state gasoline into account, the five highest of which are found in Pennsylvania ($ 0.57 per gallon), California ($ 0.51 per gallon), Washington ($ 0.49 per gallon), New Jersey ($ 0.42 per gallon) and Illinois ($ 0.39 cents per gallon).

And none of this takes into account the other costs and headaches that accompany gas retailing. The miniscule profits come from the costs and record keeping associated with environmental regulations at the local, state and federal levels. Competition tends to be fierce, with numerous locations clustered into high-volume transportation hubs. The price sensitivity of many drivers is active with differences of just a penny. Many stations operate 24/7 to maximize revenue. And for those who franchise, in exchange for name recognition and some volume discounts, the associated fees can be huge. (Not only do franchisees have to pay commissions to the parent company, but they also have to price their product based on national promotions, which can reduce profitability.)

The terrible business economics of gas station ownership is, in fact, why the big oil companies and refineries aren’t interested in this. And that is why they have been reducing their exposure at the consumer end of the energy sector for several decades. Unsurprisingly, it is the poor financial outlook that has prompted gas stations to retail food, drinks, cigarettes, toiletries, and a wide variety of other goods travelers may want or need. All of these assets have significantly higher profit margins than gasoline retail sales, and are key to their very survival for many independent, single-owner service stations.

So why do so many immigrants choose a business with seemingly grim financial prospects? Trisha Gopal explored this question in Eater a little over a year ago; stay kindly aware of Biden’s July 2 tweet as she reads her explanation:

As I talk to each owner, I realize that choosing a gas station is always utilitarian. When I ask her why they chose a gas station, Angelina Rizo gives me two answers. The first is what I hear from every restaurateur I talk to: people need gasoline, so as long as people drive, the more likely they are to have customers and the more likely those customers are to need something to eat. It’s an explanation rooted in the same immigrant mentality I’ve seen and heard all my life: look for opportunities, stay alert, and always find a way to be useful. When we ask why immigrants are so entrepreneurial, it is because many of us are taught to first look to see where they are needed and then, once we are there, to go further.

There is also a darker component to Biden’s blame redirection. It is ironic that an administration built on an ideological commitment to political correctness and the idea that words must be selected with surgical precision would clumsily indicate this. Gas station owners, a business community over-represented by new immigrants to the United States, have often been subjected to racist and xenophobic wrath. Accusing them of a particularly damaging aspect of the ongoing rise in inflation is beyond wildly inaccurate, irresponsible and morally unreasonable.

Nobody expects government officials, especially career politicians, to understand any of this. Nor do they have any incentive to include real economic, financial and commercial details in their static and simplified letters. The image of gas station owners as highly paid corporate executives at the helm of multinational corporations is one that the Biden administration has a vested interest in promoting. And there is no better measure than a political body without ideas than an increasingly frenetic leap from scapegoat to scapegoat.

Peter C Earle

Peter C Earle

Peter C. Earle is an economist and writer who joined AIER in 2018. He previously spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area, as well as running a game of games. gambling and cryptocurrency advice.

His research focuses on financial markets, cryptocurrencies, monetary policy issues, game economics, and economic measurement issues. He has been cited in the Wall Street Journal, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media and publications.

Pete holds an MA in Applied Economics from American University, an MBA (Finance), and a Bachelor of Engineering from the United States Military Academy at West Point. Follow him on Twitter.

Selected publications

“General Institutional Considerations of Blockchain and Emerging Applications” Co-authored with David M. Waugh in The Emerald Handbook on Cryptoassets: investment opportunities and challenges (forthcoming), edited by Baker, Benedetti, Nikbakht and Smith (2022)

“Operation Warp Speed” co-authored with Edwar Escalante in Pandemics and Freedom (forthcoming), edited by Raymond J. March and Ryan M. Yonk (2022)

“A Virtual Weimar: Hyperinflation in Diablo III” in The invisible hand in virtual worlds: the economic order of video gamesedited by Matthew McCaffrey (2021)

“The Fickle Science of Lockdowns”, written in collaboration with Phillip W. Magness, Wall Street newspaper (December 2021)

“How does a well-functioning Gold Standard work?” Written in collaboration with William J. Luther, SSRN (November 2021)

“Populist prophets, public prophets: profit-making pipers, then and now” in Financial history (Summer 2021)

“The Forgotten Blocks of Boston” in The American Conservative (November 2020)

“Private governance and rules for a flat world” in Creighton Journal of Interdisciplinary Leadership (June 2019)

“The ‘Federal Jobs Guarantee’ idea is expensive, misleading and increasingly popular with Democrats.” Investor business newspaper (December 2018)

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