Since January 2021, gas prices have steadily increased to where they are now, hovering around $5 per gallon. Driving to work and school now costs a small fortune and Americans are struggling to make ends meet. One poll found that 87% of Americans are experiencing financial hardship and many are dipping into their savings to pay for everyday necessities like groceries and gas.
In response, President Biden tweeted for gas station owners to start lowering the prices they charge at the pump. With gas prices expected to remain high, it’s worth asking: Can gas station owners simply reduce the price you pay at the pump?
President Joseph Biden
Mostly false or misleading. Significant errors or omissions. Mostly make believe.
The majority of gas station owners are small, independent businesses and the price you pay at the pump is a reflection of built-in expenses and operational costs. The main driver of what consumers pay at the pump is determined by the “wholesale” price of gas or, rather, the price gas stations owners pay to purchase the gas they will then offer for sale.
Whole-sale prices are set by three main elements: the price of crude, refining (i.e. transforming crude into usable products like gas for your car), and taxes, including federal, state and local.
- The price of crude is a reflection of production costs, which includes the cost of extracting oil from the ground, regulations, transportation and taxes. This value varies from region to region. It is also the overarching balance of supply and demand today and what markets expect that balance to be in the future.
- The price of refining accounts for the process of transforming crude oil into usable products like gasoline for your car or jet fuel for airplanes. On average, refining accounts for 26% of the price per gallon.
- Taxes vary across the country. There is a standard 18.4 cent federal tax plus state and local taxes as well as other “environmental” fees like oil tank inspections and underground storage tank fees. On average, state and local taxes add about 38 cents per gallon.
There is one other element that goes into the price consumers pay at the pump. Distribution and marketing accounts for the difference between what gas station owners pay to purchase fuel (i.e., the whole-sale price) compared to what consumers pay (i.e., the retail price). This covers the cost of freight, labor, utilities, real estate and credit-card fees (keeping the gas station in business). There is also a marginal profit added in typically between 1.5 to 2 cents per gallon.
But even these profits are notoriously low. According to one financial firm, “gas stations make an average net margin of just 1.4% on their fuel which is far lower than the 7.7% average across all industries—and ranks beneath other notoriously low margin businesses like grocery stores (2.5%) and car dealerships (3.2%).” The majority of gas station profits come from the sale of convenience store items like snacks and drinks.
The president calling on gas station owners to simply lower the price they charge at the pump is both dishonest and uninformed. Further problematic, it directs consumer angst to small business owners who are themselves struggling to stay in business. In fact, 60% of the 116,641 gas stations are owned by an individual or family that owns a single store. There are numerous options available to the president to lower gas prices for Americans. The industry recently put together a list of actions he could take today that would provide immediate relief. This list largely includes doing away with the numerous, artificial barriers the Biden administration has imposed on the U.S. oil and gas industry. This includes rescheduling recently canceled lease sales, approving pipelines, such as the Keystone XL, withdrawing a barrage of costly red tape, and opening up federal lands for energy production.