How Do Gas Stations Set Their Prices?
The cost of crude oil isn't the only factor when it comes to determining what you pay at the pump.
How do stations like the Speedway at LaGrange and Laraway roads in Frankfort determine what you pay at the pump? The price of crude oil is just one factor.
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- CORRECTION: An earlier version of this story stated Speedway's owner was Marathon Oil. In late June, Marathon Oil and Marathon Petroleum Corporation split into two seperate, publicly traded companies with no business ties. Marathon Petroleum owns the gas station company. We regret the error.
Sometimes, the best story ideas come from readers. Take this email that came in this week:
I want to know why Orland Park, Orland Hills and Tinley Park can have cheaper gas prices than Mokena and Frankfort when they have an additional Cook county tax added to the pump price? Also New Lenox and Joliet also have cheaper prices for the same brands of gas than us.
The question intrigued me, so I put in a call to Shane Pochard, spokesman for Speedway, the company that recently took over the majority of gas stations in Frankfort after buying the village's Gas City stations in that company's April bankruptcy auction. I asked him to explain the ins and outs of how his company determines what people will pay at the pump.
How are prices set?
Pochard said Speedway sets the prices at individual stations based on a variety of factors, including the cost of crude oil and comparing the prices of competing gas stations.
According to the U.S. Energy Information Administration, what you pay for a gallon of gas is broken into four areas in approximately the following percentages:
- Cost of crude oil: 66 percent
- Refining costs and profits: 12 percent
- Distribution and marketing: 11 percent
- Taxes: 11 percent
How much money do stations make at the pump?
"Typically, we're making pennies on the dollar," Pochard said. "That's not where we focus our income potential. We try to drive people inside (to the convenience store)."
Credit card swipe fees—what a business pays credit companies in order to accept customers' charge cards—eat into profits as well, Pochard said. And stations don't factor this into the price because they'd rather stay competitive, he added.
How can stations owned by the same company in the same town vary in price?
This can happen for a couple of reasons, Pochard said. The most mundane explanation is that stations don't change prices at the same time.
A more business-minded reason is competition. A Speedway station in a part of town with competitive stations might keep its prices lower than another station across town that has no competition, Pochard said. Those competing stations are called "hyper-marketers," he added, and it's something the company keeps an eye on.
"If a hyper-markerter is (in the area), we have to lower our price to meet it," Pochard said. "We'll try to meet those prices. We want to be in a competive area."
Why don't gas prices drop immediately when the cost of crude falls?
"We get that question quite a bit," Pochard said. "The answer is that there's some lag time."
The gallon of gas you're putting into your car today was refined from crude oil bought months ago, he said. And that means you're paying for the rate of crude oil from months ago, not currently. Eventually, Pochard said, it evens out.
Editor's note: While reporting this story, I learned something interesting about the ownership of gas stations in Frankfort. Speedway, which is owned by Marathon Petroleum Corporation, owns and manages the majority of the stations in the village. The two other Frankfort stations are owned by Circle K and Atlas Oil. And guess who owns Atlas? Marathon Petroleum.
How far away will you travel for cheap gas?
Tell us in the comments.
In This article
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Circle K
7600 W Lincoln Hwy, Frankfort, IL -
BP Connect
16 E Lincoln Hwy, Frankfort, IL -
Dan
10:56 am on Friday, August 19, 2011
Simply put---Speedway is intentionally overcharging the residents and consumers that live and buy gas in Frankfort, Mokena and New Lenox. The reasons given by the Speedway representative make no sense. Just look at the pricing in Homer Glen and Lockport in Will county and you will find they are also continuously lower. Please stay on this story and you will find what I am saying is true.
GEORGE
12:13 pm on Friday, August 19, 2011
Glad to see someone is investigating this. We need more details. Most of the stations in Frankfort are overcharging their customers. I bought gas near Park Forest and paid $3.56 a gallon. Frankfort was still charging $3.85. BP on 30 and LaGrange has not dropped their price in over a week.
Joe Vince
1:02 pm on Friday, August 19, 2011
Dan and George:
I think part of the problem for Frankfort is a lack of competition from other gas stations. It really shocked me how much one company corners the market here. I can't really speak to the other areas with lower prices, but I bet you they have competition from independently owned stations.
GEORGE
11:18 pm on Saturday, August 20, 2011
You are right about that. Any suggestions on what can be done to get this problem corrected?
Karen Kurowski McHugh
5:39 pm on Friday, August 19, 2011
If we are paying on a lag time (reason given why prices take a time to go down) please ask the Speedway rep why is it when crude prices rise do the prices at the pump go up a nanosecond after oil prices rise?? Where's the lag time when prices go up? Hmmmm??
Joe Vince
12:32 am on Sunday, August 21, 2011
@Karen:
Pochard said that the lag time works both ways and that pump prices don't skyrocket immediately when crude oil prices spike. I don't have the empirical data, but I do remember times when this has happened. What's more common, however, is when prices drastically increase because of other factors, like in the case of Hurricane Katrina or the U.S. invasion of Iraq. I know in those cases that states have investigated companies because of a suspicion of price gouging.
Joe Vince
Local editor, Frankfort
GEORGE
11:26 pm on Saturday, August 20, 2011
Excellent point. Obviously many corporations are profiting at the expense of the consumer. Maybe a good old fashion boycott would get someone attention. I for one will not purchase gas in Frankfort until the prices are lowered to a fair price.
Joe Vince
12:42 am on Sunday, August 21, 2011
@GEORGE:
Not sure what can be done about the lack of competition in Frankfort. I imagine it's a tough business for independent station owners, especially if they make so little profit at the pump.
I'm assuming you would be getting your gas outside of Frankfort from stations that were independently owned, right? How far would you travel to fill up your tank?
Long term, I think the biggest way to bring down gas prices at the station is to create a national energy policy that starts to move away from a reliance on crude oil. But that's just my two cents.
Joe Vince
Local editor, Frankfort
GEORGE
5:21 am on Sunday, August 21, 2011
As far as distance one only needs to travel to New Lenox or Matteson to get a lower price.
Gasbuddy.com is a great resource for getting current prices on gas. It look like BP sets the tone for the prices in Frankfort. Everyone else tends to follow.
GEORGE
5:29 am on Sunday, August 21, 2011
Joe you speak of investigations in the past. Have you noticed that the results of those investigations are rarely reported? Who (State & Federal) in fact is tasked with overseeing "price gouging" and what are the penalties?
Joe Vince
9:48 pm on Wednesday, August 24, 2011
@GEORGE:
Sorry for the delay in getting back with you. I was looking up some of that information for you.
Here's an article about an investigation into price gouging in Illinois in 2008 after Hurricane Ike: http://www.galesburg.com/news/x693640541/Illinois-attorney-general-looks-into-gas-price-gouging-reports
And here's a more recent investigation in Indiana: http://www.fox59.com/news/wxin-indiana-gas-prices-indiana-attorney-general-investigating-spike-in-gas-prices-20110425,0,3683363.story
Also, I found this state site that tries to explain the difference between price volatility and price gouging. As you can see, even the government has trouble telling the two apart: http://www.illinois.gov/gasprices/pgVspv.htm
Hope this helps,
Joe Vince
Local editor, Frankfort
Dan
11:02 am on Tuesday, August 23, 2011
To George's point-----It looks like possible price gouging is really what is going on here when compared to other communities that have a Speedway. I hope Joe will continue to follow up on this story with Speedway to find out why the residents and consumers in our area are being overcharged.
Michael Sinks
3:20 am on Wednesday, August 31, 2011
Since the first of summer oil prices have fallen nearly 20% but the price at the gas pumps have fallen only about 5%. Where's the disparity? I also think that the gas companies will use any excuse for raising prices (broken pipe lines, hurricanes, the war in the middle east, etc.), wish I could use some of these excuses when it comes to paying my bills.
Dan
2:37 pm on Friday, September 2, 2011
Once again bought gas at the Speedway Lockport in Will county for ten cents per gallon cheaper than our area Speedways was pricing it at. Does not make any sense as to why are our local area of Frankfort, Mokena and New Lenox is consistantly being asked to pay more than other areas. To my knowledge the Lockport tax rate is the same as ours
Someone's Mom
10:02 pm on Tuesday, September 6, 2011
The gas stations in Frankfort are not the only businesses that charge higher prices than neighboring communities. McDonald's restaurants in Frankfort also charge higher prices for many of their menu items compared to other south suburban towns.
Joe Vince
10:55 pm on Tuesday, September 6, 2011
@Munchkin:
I'm going to have to check that out about McDonald's.
Also, the <a href="http://frankfort.patch.com/listings/gas-city-station-45">Speedway at 22310 S. LaGrange Road</a> has the cheapest gas in L-W and most of the surrounding area (Monee excepted) at $3.84.
Joe Vince
Local editor, Frankfort
Steve Burke
11:21 pm on Tuesday, September 6, 2011
I have no clue. I just know the Shell station in Homewood does not actually want to sell gas given the prices they sell it for (about $.25/gal above market). In fact, they are often out of gas. How do they stay in business?