If you drive a car, odds are you have a rough idea how much gasoline costs. You might even go out of your way to save a few cents per gallon.
WPLN News listener Luke Gebhard has certainly noticed some stations have cheaper gas. And he and his co-workers at a management consulting firm for the power industry have been talking about it.
My colleagues and I are curious about the wide variance in gas prices between neighborhoods. Do some stations charge more simply because they know customers in those neighborhoods — e.g., Brentwood and Green Hills — will pay the premium, or are there other factors at play?
They noticed the difference when their firm moved from Germantown to temporary space on Murfreesboro Road south of downtown. The difference was about 40 cents per gallon, according to Gas Buddy, a website that lets drivers post the latest prices.
There’s a gap in real estate values between the two neighborhoods. But one clue that there’s more to it than pure costs can be found in Brentwood, where wholesale discounters frequently offer gasoline at steep discounts.
“I’m staring across the street at the Brentwood Costco,” Gebhard said when reached by phone, “and like the line is backing up into Seaboard [Lane] because people are waiting to fill up.”
To understand why gas is more expensive at some stations, you first have start by understanding why there isn’t even more variation in price. After all, it’s not uncommon to pay twice as much money for a bottle of wine. Gasoline tends to be priced more or less the same, whether it comes from a station that displays the name of a big oil company or a station with no brand at all.
“About 10% of people buy gas because of a specific brand,” says Jeff Lenard, a spokesman for the National Association of Convenience Stores. “But largely people buy gas based on price.”
That’s in part because gasoline is a commodity, and there’s very little difference from station to station. Operators that don’t display a name brand often purchase their blends from those same companies.
But it’s also because the price of a gallon of gasoline is prominently advertised.
“You have that big sign out front, and you can price shop at 45 miles an hour and pick whichever one you want,” says Lenard.
That means stations tend to charge as little as possible, just enough to cover costs such as supply, fuel taxes and real estate. That leaves the typical profit margin of only about a dime a gallon, according to NACS.
Stations make the real money on an entirely different product: snacks.
“When people set their gas price, they’re looking at two things: They’re looking at the gas customer, and they’re looking at the in-store customer,” says Lenard. “Because they know about 44% of people who buy gas, go inside the store … where you can make more money on a sandwich, a snack, a drink or something like that.”
Some stations, like a wholesaler or a big truck stop, might not charge a gas markup at all. They’re using gas to pull customers into their stores.
In such a hyper-competitive market, the exceptions are the stations that charge more than the bare minimum. They tend to be in places where people don’t go inside for purchases, like near the rental car return at airports or in neighborhoods where people pay at the pump.
It turns out, the secret to why gas prices vary so much is how often we visit the Slurpee machine.