Gas-station owners' profits hinge on thirsty customers

Convenience-store owner David Malik earns about as much on a can of Coke as he does on a typical 10-gallon purchase of gas.

Malik's gross profit on gasoline is roughly 3 cents a gallon after paying for supplies and credit-card fees, but he earns 30 cents on the soft drink.

And when trouble in a faraway oil-producing nation spikes energy prices, his profits here are squeezed even more.

"When oil-company profits go up, my profits go down," said Malik, 51, who lives in Bellevue and owns seven gas stations in South King County under different major brands.

Even as his costs rise, he tries to keep a lid on gas prices so drivers will stop at his stores instead of the competition's. Volume is the only way to make this slim-margin business profitable.

"Every time the price of gas goes up, it costs us more money."

Malik's real gain lies in bringing customers into his convenience stores — where they can buy that all-important can of Coke.

High prices, slim profits

For the average consumer, gas stations are the only visible face of an industry where record profits last year for global companies like Exxon Mobil have sparked countless complaints, government investigations and accusations of price-gouging. On Thursday, Exxon Mobil, the world's largest publicly traded oil company, reported some $10.26 billion in quarterly profits — lower than last year but still dwarfing giants in other industries.

Yet the mostly independent gas-station owners, who typically operate franchises under the oil companies' brand names, saw little of the windfall. Retailers last year earned an average of 2 to 3 cents per gallon before taxes, said Jeff Lenard, a spokesman for the Alexandria, Va.-based National Association of Convenience Stores.

Although convenience-store sales surged 15 percent last year, profits dropped 23.5 percent. Lenard said rising credit-card fees and sharp fluctuations in fuel prices caused the drop in profits after a steady three-year climb.

Operating a gas station "is not very profitable. It's also very volatile — even more volatile than the refining side of the business," said Fadel Gheit, a New York-based oil analyst with investment bank Oppenheimer & Co. For the retailers, "most of the profit is in the convenience store — a prime location in high-traffic areas where people find it easier to buy small items without having to go to town."

They feature gas, but station owners increasingly rely on in-store sales for their living.

"You cannot live on one without the other," said Wagih Abu-Rish, 65, who owns a Union 76 gas station in North Bend.

Big-box stores' recent ventures into gasoline dealing are also putting pressure on the retail side at some convenience stores because the bigger companies can easily weather cost spikes and offer better prices. When the likes of Issaquah-based Costco installs pumps in its parking lots, "it affects your margin and affects your volume," Abu-Rish said.

Price-gouging worries

The small retailers' ordeal underscores the complexity of the oil and gas industry, a critical and poorly understood sector that stirs concerns about inflation, energy security and climate change, and sits squarely on top of the public agenda.

Consumers are vocal — and suspicious — concerning what they pay for their gasoline: The Washington attorney general's office has received more than 100 e-mails, phone calls and letters this year complaining about gas prices, spokeswoman Kristin Alexander said. The agency is coordinating a study on the factors that influence gas prices in the state, to be released in mid-August.

A Federal Trade Commission report last year found no evidence of price manipulation among oil companies. But for many politicians, price gouging remains a rallying cause. In late June, the U.S. Senate passed an energy bill that criminalizes price gouging, but it's still far from becoming law.

Oil-industry advocates say legislation that meddles with prices will keep the market from balancing itself by attracting imports from other countries, and will actually increase costs for consumers.

Abu-Rish, who has been in the business since 1985 and recently sold four other branded stations ahead of his upcoming retirement, said a few customers taunt him with comments like, "It must be good times for you" or "When are you going to buy a condo in Hawaii?" But most realize he has little control over fuel prices.

Kent real-estate agent Harry Timko, recently filling up his Toyota Tacoma pickup at Malik's station, blamed oil companies and fuel taxes, not retailers, for his $200 weekly gasoline bill. "I understand oil companies are in the business to make a profit, but at the same time it's at our expense," he said.

What's behind the price

Average gasoline prices fell 9 cents last week to $2.96 per gallon, the U.S. Energy Information Administration (EIA) said Wednesday. But summer driving will remain expensive: While vacation-bound drivers are hitting the roads en masse, West Coast prices will average $3.16 a gallon, about 13 cents more than last year, according to the agency's latest estimates.

Here's what contributes to the price Americans pay at the pump, according to an analysis done this spring:

• The price of crude oil: 46 percent, according to the EIA.

• The refining process: 28 percent. Refining converts crude oil into gasoline and other products.

• Taxes: 13 percent. Washington state's gas taxes are the fifth highest in the nation, according to the American Petroleum Institute, an oil-industry association. An increase of 2 cents — to 54.4 cents per gallon — kicked in July 1.

• Distribution costs: 13 percent. This is the slice shared by wholesalers and the stations they sell to. The profit margins there are slim. Most of the markup goes to paying for storage, transportation, payroll expenses and mortgage and credit-card fees.

Dealers particularly resent paying high credit-card fees. Visa charges 1.95 percent of the value of every transaction, plus 10 cents, at Malik's Chevron-branded stations. The charge is slightly smaller for debit cards. Malik would like to see more customers pay cash, but that's unlikely amid rising gas prices, which make people prefer plastic.

Credit-card sales represented 65 percent of convenience stores' total last year, up from 54 percent in 2004, Lenard said.

Why we pay more

The factors that make gasoline prices move are determined by global markets. As bit players in oil's great game, gas-station owners watch from the bench and find themselves increasingly vulnerable.

Crude oil is by far the most important element of the price. Its cost has more than doubled since 2003 as crude output hasn't kept pace with soaring demand. At current prices, crude-oil production is extremely profitable to major oil companies, accounting for about two-thirds of their income.

With the supply so tight, threats of an unexpected shortage caused by political strife or natural disasters in oil-producing regions can send prices through the roof.

Most of the oil that comes to Western Washington is extracted at Alaska's Prudhoe Bay field, the largest in the United States. That supply is prone to disruption by bad weather and technical problems, such as when BP curtailed the field's output last August after discovering corrosion in its pipelines.

The price of refining also fluctuates often. Refiners can charge more for their gasoline when other refineries are down due to maintenance or unexpected trouble in a period of high demand.

We in the West often pay more than the rest of the country for several reasons: The region is cut off from massive refining hubs of the Midwest and the Texas-Louisiana coast, and it's difficult to import gasoline here from Europe and the Caribbean.

Western Washington's gasoline comes from five refineries — in Anacortes, Ferndale and Tacoma — but refinery outages elsewhere can affect what we pay for gas here, as has been the case this summer, with a spate of problems contributing to high prices.

Congress and critics of the industry have called for oil companies to greatly increase refining capacity to help make gasoline cheaper. The companies say the current push for biofuels like ethanol and biodiesel — spurred by inflation fears, global-warming concerns and competition for resources with energy-hungry China and India — could render the expansion unnecessary.

The complex interaction of these factors — and their constant change — makes gasoline pricing a difficult exercise for retailers.

"If the consumers knew how volatile this market was, it would drive them insane," said Lea Wilson, with the Washington Oil Marketers Association.

Coping with changes

Gas retailers sail through these stormy waters by generally raising pump prices slowly and dropping them slowly as well. The typical lag between a price jolt in the wholesale market and at the pump is about two weeks, says EIA analyst Doug McIntyre.

"It's a game of chicken on the way up," as no retailer wants to be the first to raise prices, says the convenience-store association's Lenard.

"On the way down you try to extend your margin," holding prices steady for a time even as costs fall, he explained.

The wild swings that oil prices have seen in the past few years have taken their toll on gas-station owners. Some not only look across the street to see what their competitor is doing but check gasoline futures in the New York Mercantile Exchange to follow pricing trends.

To remain profitable, they also focus on selling more soft drinks. In-store sales, dominated by cigarettes, packaged beverages and beer, grew 8.3 percent in 2006, according to NACS.

As for gasoline, global scarcity in the face of growing demand puts oil producers and refiners firmly in the driver's seat, said Abu-Rish, the North Bend gas-station owner. "In a tight market, the dealer is less important."

Ángel González: 206-515-5644 or agonzalez@seattletimes.com

"Every time the price of gas goes up, it costs us more money," says David Malik, who owns seven gas stations in South King County. A retailer's profit margin on a gallon of gas is very small, and most rely on in-store sales of beverages and cigarettes to make money. (BETTY UDESEN / THE SEATTLE TIMES)