Why U.S. Gasoline Prices Stay High
Even as Oil Prices Fall
President Trump is berating gasoline retailers
for keeping prices high. Evidence suggests the business has grown more profitable.
·
Oil
prices have declined to
nearly pre-conflict levels as tanker traffic resumes through the Strait of
Hormuz after four months of disruption.
·
Gasoline
prices at the pump have not fallen as quickly, prompting President Donald Trump to accuse
retailers of price gouging and demand immediate price cuts.
·
Similar
concerns were raised by President Joe Biden in 2022 after Russia's invasion of Ukraine caused a surge
in energy prices.
·
Retail
fuel margins have widened significantly over the past decade, increasing from around 20 cents per gallon to
about 40 cents, according to industry data.
·
The wider
margins are due to:
o
Rising
operating costs (wages, rent, insurance, etc.).
o
Higher
profits captured by retailers during periods of price volatility.
·
Large
fuel chains such as Wawa
and Buc-ee's benefit from:
o
Bulk fuel
purchases at lower prices.
o
Economies
of scale unavailable to independent gas stations.
·
Retail
margins rose sharply after the 2022 fuel price spike, and retailers have
largely maintained those higher margins even after wholesale prices eased.
·
Loyalty
card programs allow
retailers to keep posted pump prices higher because many regular customers
receive discounts through rewards programs.
·
During
periods of rapid price volatility, consumers are less certain about fair
prices, enabling retailers to maintain elevated prices even after wholesale
costs decline.
·
Several
major retailers acknowledged benefiting from volatility:
o
Casey's
General Stores reported
fuel margins of 46.9 cents per gallon, contributing to a 29% increase in
fuel gross profits.
o
Murphy
Oil and Sunoco also cited
volatility as a driver of stronger profits.
·
Industry
executives noted that margins typically:
o
Compress
when wholesale prices rise.
o
Expand
even more when wholesale prices fall.
·
Algorithmic
pricing software has
become increasingly sophisticated, allowing fuel retailers to adjust prices
rapidly using market-wide data.
·
Research
suggests these algorithms may reduce price competition by enabling
retailers to avoid aggressive price wars without explicit coordination.
·
One major
pricing platform, Kalibrate, is used by 15
of the top 20 U.S. fuel retailers.
·
Canada's
Competition Bureau
previously investigated Kalibrate over concerns it
facilitated coordinated gasoline pricing.
·
In the
U.S., a California lawsuit alleges Kalibrate
acts as the "central nervous system" for coordinated retail gasoline
pricing.
·
California
was chosen because:
o
The state
has persistently high gasoline prices beyond what taxes and regulations
explain.
o
A state
commission identified unusually high profit margins throughout the gasoline
supply chain.
o
California
recently amended its competition law to treat certain pricing algorithms as
potential illegal coordination.
·
Antitrust
experts say proving algorithm-driven collusion remains difficult, although
California's updated law may improve the chances of successful litigation.
·
The
lawsuit is expected to take years to resolve.
·
Industry
analysts believe gasoline prices are unlikely to return to the unusually low
levels seen in early 2026, as each price spike tends to establish a
permanently higher baseline for retail fuel prices.
As
tankers start sailing again through the Strait of Hormuz, oil prices have fallen
nearly to their level before fighting blocked off the Persian Gulf four months ago.
As usual for a so-called supply shock, prices at the pump aren’t falling as quickly,
as gasoline retailers take the opportunity to recoup some of the profits they lost
as prices rose.
President
Trump isn’t having it.
“The
retailers must quickly react to this statement, and do what they know is right —
DROP YOUR PRICE FOR OUR GREAT AMERICAN PEOPLE!” he wrote in a social media post
last week. He said he wouldn’t stand for price gouging, “which is totally illegal.”
It’s
not the first time a president has warned against price gouging when the politically
sensitive price of gas soured public sentiment. President Joseph R. Biden Jr. sounded
very similar in 2022, when Russia’s invasion of Ukraine sent energy prices soaring.
So,
do they have a point?
In
some ways, yes. The difference between what retailers pay for wholesale gasoline
and what they charge drivers has been widening over the past decade, from around
20 cents a gallon to about 40 cents, according to data collected by Dow Jones’s
Oil Price Information Service. Although much of that can be chalked up to their
own rising costs, industry experts say there is likely a component of extra profit.
“It’s
inflation, but it’s also opportunity,” said Tom Kloza, chief energy adviser for
Gulf Oil. That is especially true for high-volume, fast-growing chains like Wawa
and Buc-ee’s, which can buy fuel in bulk for less than the independent store owners
who make up more than half the industry.
“The
economies of scale just work wonderfully for them,” Mr. Kloza said.
Retail
gasoline margins took their last big step up in 2022, as prices topped $5 a gallon.
Other costs like wages, insurance and rent were rising steeply as well, increasing
the overhead required to provide that gasoline. Retailers charged accordingly, and
those costs have generally not gone down.
Gasoline
price spikes also tend to push consumers toward loyalty cards, which offer a few
cents off per gallon. According to surveys by Upside, which itself offers discounts
for new customers, nearly half of drivers say they regularly use such programs.
That may prompt retailers to keep posted prices a little higher, since frequent
drivers use loyalty points to take the edge off their bills.
“When
we’re talking about margin per gallon, that’s assuming the sign price is what people
are actually paying,” said Thomas Weinandy, Upside’s chief economist. “But that’s
becoming more and more a sticker price rather than the actual paid price.”
This
latest period of elevated prices comes with an additional quality that plays to
the strengths of large chains: volatility. When prices move up and down rapidly,
consumers have little sense of what seems fair, and companies can keep prices high
even when costs drop.
Just
ask Casey’s General Stores, the publicly traded group of Midwest gas stations that
also prides itself on its pizza. The company posted a margin of 46.9 cents per gallon
on fuel in the quarter that ended April 30, up 9.3 cents from the same quarter last
year and contributing to a 29 percent increase in gross profits from fuel.
“It
was just a little bit more volatile on the way up relative to the experience we’ve
had in the past, and that enabled us to capture a bit more margin than we might
have otherwise,” said Darren Rebelez, the company’s chief executive, on an earnings
call last month. Independent stations face the same price pressures with fewer methods
of managing them, another executive noted, leaving little reason to give up their
own margins.
Murphy
Oil also posted a strong quarter and noted that volatility helped its bottom line,
as did Sunoco, which emphasized its ability to shift supply networks as different
sources and delivery routes changed in price.
“That’s
not always a bad thing. In fact, in our world, a lot of times, that can mean value
creation,” Karl Fails, Sunoco’s chief operating officer, told investors in June.
Margins compress as prices rise, but widen even more as they come down. “I’d say
you get an overall kind of net bullish margin environment,” Mr. Fails said.
There
might be one more thing going on.
Gasoline
retailers have for decades used digital platforms to analyze
the marketplace and figure out how to set their prices. Earlier versions of the
software required the user to manually program how prices should respond to trends,
such as a demand increase over Thanksgiving weekend.
“These
are the rules that have existed for a long time,” said Daniel Ershov, an economist
at University College London. “The difference now is you have much more sophisticated
algorithms that learn stuff a lot faster and incorporate a lot more information.”
Mr.
Ershov studied the use of algorithmic pricing services in Germany, where data is
more easily available to researchers. He and his co-authors found that the use of
such services pushed up prices even in superficially competitive markets, possibly
because the algorithms learned to tacitly collude to avoid price wars.
One
of the most widely used pricing platforms in Europe and North America is called
Kalibrate, which says 15 of the top 20 fuel retailers
in the United States use its services. Two years ago, the Canadian Competition Bureau
opened an inquiry into the company, aiming to assess whether it was allowing gas
stations to collectively raise prices.
American
antitrust watchdogs haven’t followed suit, but last month, a team of lawyers, including
some who have recently left the Federal Trade Commission, filed a lawsuit claiming
that Kalibrate “provides the central nervous system for
a conspiracy to extinguish retail price competition among gas stations.”
The
case was brought in California, for two reasons. One: The state has notoriously
high gasoline prices that cannot be entirely explained by known factors including
taxes, regulations and a lack of refining capacity. A state commission determined
last year that this “mystery surcharge” was due in part to higher profit margins
across the gasoline supply chain, which is also relatively consolidated and vertically
integrated from refiners to retailers.
And
two: Just last year, California tweaked its competition statute to clarify that
pricing algorithms that share data across firms qualify as illegal coordination.
That lowers the bar for success for cases like this, which have not all fared well
in federal courts. It’s difficult to prove anticompetitive behavior
if companies can plausibly deny they got together to conspire.
“I
think this one pretty clearly reflects some lessons learned from how those previous
cases have gone,” said John Mark Newman, a law professor at the University of Memphis
who worked at the F.T.C. when it brought those suits. “When you step back, it’s
kind of absurd to say, ‘Oh, if you only did the common scheme 90 percent of the
time, there was no agreement at all?’ That’s not how antitrust is supposed to work.”
The
case will take years to wind through the courts, if it isn’t tossed out. In the
meantime, experts are betting that the relatively low gas prices of early 2026 aren’t
coming back, despite the president’s exhortation.
“You
get these big spikes, it resets, but it usually resets back to a level that is above
where it was before the spike,” said Bobby Griffin, managing director of specialty
retail at Raymond James.