Why do gas prices fluctuate when the gas in the station's storage tanks is already paid for?

Question

I know that oil prices change daily, almost hourly it seems lately. How does a gas station make money when their fuel is already paid for? As an example a station buys gas for $2.00 per gallon and they later change their retail price to $1.98 per gallon. Aren't they losing money?

I'm asking about prices dropping below cost, not rising above. Last time I saw gas prices drop was yesterday!

Answer 1

First of all, a station will almost never sell the gas for less than they bought it. The only possible reason to lower the price to less than they bought it for is to attract customers. This way, consumers will be flocking to their station as they have some of the lowest prices in town. This way, when the gas station raises the price to above what they paid for it, hopefully all these new customers will stay with them.
Example -
A gas station buys gas at $1 per gallon.
If they charged a price $1.50 per gallon, and they sold 10 gallons in 10 days, they would make $5 in 10 days.
However, if they bought gas at $1 per gallon, and sold it for 5 days at $.75 per gallon, they might sell 15 gallons in 5 days, because hypothetically, they had the lowest prices in town.
The for the next 5 days, they sell 15 gallons at $1.25 per gallon. So, in 10 days, they would make $15 instead of $5.

Hope you get this -- in short, the answer to your question is that gas stations lower prices to attract customers so they make more money in the future.

Answer 2

Sure it's possible a gas station could sell below cost, if the retail market moved against it quickly and significantly. Price is determined by immediate supply and demand, not by the cost of inputs. A gas station owner will charge more if they can, or less if they have to. Business sometimes get stuck having to sell below costs. In a competitive market you can't grandstand on your ideal price when the guy across the street is selling the same thing for 10 cents a gallon less. You have to sell inventory to get cash flow to pay your expenses, or else you go out of business.

Now as a practical matter the owner intends a retail mark-up, and that mark-up is normally large enough to pay for the building, labor, utilities, etc, and leave some profit -- or else there would not be a retail gasoline station industry in the first place. I expect that means there's enough cushion that your scenario is uncommon and at worst could only be temporary -- but it could happen.

Answer 3

First of all your premise is a little skewed. The price of gas you are seeing is with between 100 and 200% markup. In 1999 when I was a school bus driver diesel was about 1.75 per gallon at the pump. However, the bus company bought it in bulk at wholesale prices and paid 56 cents per gallon. Although the prices are different today, I seriously doubt the mark-up is.

The prices fluctuate with the market because we have capitalism and the oil companies can do it. No matter what the service station paid for it originally, price drops will NEVER go below what they paid for it. as long as the Sheeple in America buy the lies of the oil companies and don't demand better mileage on our autos then things will never change. I would like to see $5.00 per gallon gas. Maybe that would get people off their butts and start screaming for true alternate propulsion and get off the oil teat.

Answer 4

I asked two gas station owners that same question. They claimed that no matter what the price of gas is they only make about 10cents per gallon, at least in our area. So when the price goes up for them they are still only getting 10 cents per gallon. That doesn't exactly answer your question, but I found it interesting that that was all they gained for every gallon of gas. If the price they pay goes down, they still get 10 cents per gallon, unless they buy a shipment for say 2$/gal and charge 2.10/gal. If on the next day their competitors get it for 1.80/gal and charge 1.9/gal as they are custom, the first guy will have to eat his loss because he has already paid for his gas. They try very hard to only have what they think they will need for the day.

Answer 5

When Was The Last Time You Seen Gas Prices Drop?

Answer 6

If the market price of gasoline drops to $1.98, the gas station in your example cannot sell for $2.00/gallon, or they'll lose business to the one across the street that is selling for $1.98.


Individual gas stations have very little control over what they can charge because there is pure competition --- despite what the Chevron ads tell you, very few customers are brand loyal to a particular brand of gasoline. This is why most stations sell high-margin snacks inside, and also why they push their "gas cards" so that you'll stay brand loyal.



Edit: To the nutjobs shrieking about some US conspiracy, gas prices, adjusted for taxes, are the same in most other European and North American nations. Gas prices in countries with significantly lower market rates occur because of government subsidies, or government-run oil industries.

Answer 7

If a " Junkie " had to buy his stuff at a different price to feed his need, then most certainly he will pay the price. We in this country are " Addicted " to the " Oil Mongers Oil, " and without it, what would we do? If this whole nation went on strike for just " ONE DAY ", THEN WE WOULD SHOW THAT WE MEAN BUSINESS!!! There is'nt a " Crises in Fuel ", Only a " Crises in Ignorance ". Will We Ever Wake Up???????????

Answer 8

That's the million dollar question.

Answer 9

hmmm.... imagine this...

you just purchased a piece of gold, then gold prices go up

will you sell your gold for what u paid for it?

think about it, everything would work like this if it were not for "menu costs"

Answer 10

ask the president of the us