The Truth About Rising Gas Prices

Gasoline is once again on its way up. Bad memories of the not-so-distant past when gas was $4 per gallon are quickly coming back, as the average price passed over $3.50 per gallon recently. When the price of gas heads north, gas station owners do a financial dance of joy as more money pours in, right? The real story is much different. (Gas prices are influenced by more than supply and demand. Find out what determines the price you pay at the pump, in What Determines Gas Prices?)
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Gas Station Owners
Let's put ourselves in the world of the gas station owner. Supply and demand is only one way that the price of oil is set. Bad weather, countries fighting, oil regulating agencies in the Middle East and, in large part, energy traders who may or may not own the oil are responsible for the price fluctuations. Many economists believe that when the price of oil last caused gasoline to rise to $4 per gallon, it was largely because of speculators who artificially ran the price up.

Next, the oil is refined in to gasoline and sold to wholesalers who sell to you, the gas station owner. The wholesale price of your gasoline is officially set, so the gas station owner is a price-taker; there's no shopping around.

The price you charge for gasoline is largely set by what you paid for it, but you also have to look across the street at your competition. If you're a penny higher, you won't sell your gasoline, so regardless of what you paid, your prices have to be in line with the gas station across the street. When prices rise, your competition may keep their prices lower for longer, forcing you to not raise your price even if you paid more.

In the end, how much money do you make on each gallon of gasoline? Several cents per gallon is the norm. Gasoline alone won't sustain your business. In fact, selling other items is what keeps you from closing your doors. You are counting on your customers coming in to your store to purchase drinks, snacks and other higher margin items.

The Consumer
The truth is that it's very difficult to measure how rising gas prices truly affect you, the consumer. However, we do know that for every $10 sustained increase in oil prices, gas prices increase by 25 cents and for every one cent increase in gas prices, the cost to American households $1 billion. This means that a sustained increase of $10 in oil prices costs American households $25 billion!

According to a recent survey, 32% of Americans have reeled in their discretionary spending because of rising gas prices. If gas reaches $4 per gallon, that number will increase to about 41%. This may have a sustained effect on the economic recovery, as retailers feel the pinch of you the consumer holding on to your money. (Here are six gas saving tips that don't actually work. See Gas Savings Tips That Don't Actually Work.)

As prices continue to rise, you will once again reevaluate the fuel efficiency of your car, the proximity of your work to your home, the number of discretionary trips you and your family take, and you will notice small price increases in items at the grocery store, especially since your budget may be pressured even more as a result of the extra money you're paying for fuel. During the last dramatic rise in gas prices, 63% of consumers said that they combined errands and other trips and 38% of those surveyed said that they used coupons to offset gas prices.

Although it's difficult to measure the dollar-for-dollar influence of higher gas prices on the individual consumer, simple math provides the objective truth. If gas prices rise even 50 cents, it would cost an extra $10 per trip to the gas station to fill up your 20 gallon tank or an extra $40 per month if you fill up once each week. You may use more or less fuel, but for many, even $20 extra per month represents a significant impact.

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The Bottom Line
Although you may not like the gas station owner during times of higher fuel prices, the truth is that you and the gas station owner are feeling the effects together. Higher gas prices have a big impact on everybody.





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