Introducing “The Economics of Everyday Things”

Hey there, it’s Stephen Dubner. And today is an exciting day here at Freakonomics Radio headquarters. Because today is the day we introduce a new show that I think you will love. We all love it, and I will be shocked if you don’t. But, let us know, one way or the other. Our email is radio@freakonomics.com. This new show is called The Economics of Everyday Things. It’s hosted by Zachary Crockett, a journalist with a knack for looking at something we’ve all seen a million times and thinking, “Hmm, I wonder how that works.” Like I said, I think you’re going to love it. Please welcome Zachary Crockett and The Economics of Everyday Things.

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Us Americans, we just love our gasoline.

We use 374 million gallons of gas every day. That’s around 30 full tanks for every registered vehicle per year. Now, relative to other countries, gas is actually pretty cheap in the U.S. Considering the sheer amount we use, though, every extra penny counts. When gas gets more expensive, we all look for someone to blame — politicians, oil executives…

But the easiest target is the person who has to conten ith disgruntled customers face-to-face: the gas station owner.

When the price of oil skyrocketed last summer, people on the internet created all kinds of memes about how much station owners were making. One shows a picture of Scrooge McDuck skiing down a mountain of cash. It’s titled “Gas Station Owners Right Now.” But, are gas station owners really swimming in cash?

Kai TRIMBLE-LEA: No — can I yell that any louder? Not at all! It’s definitely not what people think. 

For the Freakonomics Radio Network, this is The Economics of Everyday Things. I’m Zachary Crockett. Today: gas stations.

There are 145,000 gas stations in the U.S. A lot of them have signs displaying the logo of one of the big oil companies — but that doesn’t mean the company owns the gas station. Eight out of ten gas stations in the U.S. are actually owned by independent operators. They pay oil companies for the right to use their branding and gas. Many of them came here from other countries. Like Jeetander P. Sethi:

Jeetander P. SETHI: I was born and raised in New Delhi, India. I came here, 17-year-old, in 1976. And two days after arrival, I was working at a Sonic drive-in food joint in Jackson, Mississippi.

Sethi eventually made his way out to San Jose, California, where a friend from India offered to sell him a gas station with a convenience store. He didn’t know much about the business, but he took a risk on it.

SETHI: October 10th, 1980, I bought the store and I never looked back. I named it Penny Saver — a convenience store with two fuel pumps. I bought it for $80,000. It wasn’t easy — probably worked 7 days a week, 14-15 hours a day sometime. And it was not the best location. But I got a taste of the blood and never stopped.

Since then, Sethi has owned more than 40 gas stations. He’s made good money. But the gas itself is something of a footnote.

SETHI: You know, gas business is penny business. We don’t count dollars. We count pennies per gallon.

How is that possible? Well, the stations are at the very end of a long, complex, and expensive supply chain.

Garrett GOLDING: We get the majority of our oil from our own domestic production, primarily in Texas, New Mexico, North Dakota, Montana as well. 

That’s Garrett Golding, a senior business economist with the Federal Reserve Bank of Dallas.

GOLDING: The oil company sells to the refiner. The refiner’s going to sell it to a distributor. The distributor’s going to sell it to the retail pump station or chain of stations. 

Golding says that most of what we’re paying at the pump covers that very first step of the process: pulling that raw black stuff out of the ground in Texas or North Dakota.

GOLDING: Generally between 50 and 60 percent of your cost of gasoline is that cost of crude oil.

These percentages change quite a bit, based on geopolitics, international trade, and a bunch of other factors. But let’s say, in the current climate, you buy a four dollar gallon of gas. About two dollars of that is going to cover the cost of crude. It’s another 70 cents or so to refine it; 40 cents to move it from the refinery to the gas station, 50 cents or so for federal, state, and local taxes. Altogether, you’re looking at about $3.60, just to get it to the pump. When all is said and done, gas station owners make about 30 cents for every gallon of gas they sell on average. And that 30 cents has to cover a lot of overhead.

SETHI: You got maintenance, you got electric bill, you have repairs, you’ve got the rent you got to pay, and you got all kinds of liability — fire protection, slip-and-falls…

GOLDING: So, by the end of the day, they’re averaging somewhere in the neighborhood of 7 cents a gallon of profit.

On average, a gas station sells roughly 4,000 gallons of gas every day. At 7 cents per gallon, that’s a daily profit of around $300. So, why don’t station owners charge more for gas? For starters, they have a lot of competition. Stations are often clustered together — and, well, the guy across the street doesn’t always play nice.

SETHI: I lowered it 10 cents and the guy competing with me lower 20 cents. So I lower 10 more cent. He goes another 20 cents — and he was making no money! I said, “Okay, I’m not going to play this game.” So I went up 20 cents. He went up 10 cents. It happens all the time.

CROCKETT: Do the station owners ever just walk across the street and say, like, “Hey, man, let’s just keep it at $4.15 a gallon today”?

SETHI: You know, they’re not supposed to, but many do. And some don’t — some hate each other and they compete like anything!

Station owners usually buy a few days’ worth of gas at a time, which they store in underground tanks. Once they load up, their costs are locked in for the next 48 to 72 hours. But the price of wholesale gas changes every 24 hours. If your competitor buys in at a lower cost, he might be able to undercut you. So, you have a choice to make: you can lower your prices — and maybe lose money on every gallon of gas you sell — or keep a little profit margin and … watch your customers go across the street. Ultimately, gas station owners are even more exposed to market fluctuations than their customers are.

SETHI: You really don’t have any leverage to negotiate. The price is set per day. The crude price, and the refiners — they all set their prices.

Station owners tend to insulate their customers from the ups and downs of the oil market. When crude prices go up, station owners are slow to pass on the extra cost to us at the pump. But when prices finally fall — well, they don’t pass along the savings right away either. A station owner like Sethi might keep his prices high for a while, to make up for the bad times.

GOLDING: In the economics world, the energy nerds, we call this “rockets and feathers,” where the price of oil can go up like a rocket, but the price of gasoline comes down like a feather. This is a frustrating thing for consumers to witness. But one way that I try to explain this is: generally, consumers are not getting the full price run-up as it is running up, and they’re paying for it on the way back down.

So, if gas isn’t a big money maker, how do gas stations stay in business? That’s coming up.

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Back to gas stations. Gasoline draws customers in. But for gas station owners, the core of the business isn’t at the pump. It’s inside the store.

Kai TRIMBLE-LEA: We are a gas station-slash-convenience store. We also have a takeout restaurant inside. So we try to be a one-stop shop.

That’s Kai Trimble-Lea. She owns a B.P. gas station in Milwaukee, Wisconsin. And she says the bulk of her income comes from selling food. What kind of food?

TRIMBLE-LEA: Oh, you know, the bad stuff, but that’s good stuff: pork chop sandwiches to beef Polishes to wings to catfish to shrimp, Po’boys, the corned beef sandwiches… We got some magic going on.

Trimble-Lea operates more like a bodega than a gas station.

TRIMBLE-LEA: We sell a little bit of everything: milk, eggs, bread. We sell fruit. You go to the gas station, you get some gas, and you go get a water — that’s the business model.  You’re definitely going to see more profit in the convenience store and restaurant than I would do in the gasoline.

At J.P. Sethi’s stations, the margins are 3 to 4 times greater inside, than out at the pump.

SETHI: We always ran at about 33 percent gross profit inside the store. Your cigarettes are maybe 15 percent. Your beer runs 25 percent. Candies 40, 45 percent. Coffee, 50 percent.

CROCKETT: What are the highest-grossing items for you? 

SETHI: I would love to sell you ice bags all day long. A typical ice bag would sell for $1.49, probably cost us 49 cents. 

CROCKETT: That’s pretty good

SETHI: That’s pretty darn good.

But when gas gets more expensive, that business model gets screwed up.

GOLDING: Many of these station owners, anytime we have a big price spike, they make less money as prices go up than they do than when prices go down or when they are low.

Here’s what happens when oil prices go up. Number one: that tight margin on gas gets squeezed even further. Number two: people buy less gas, meaning station owners are doing less volume. And number three: when people buy less gas, they’re also buying less soda or bagged ice inside the store.

SETHI: Now you’re having to choose, “Do I want two candy bars or just one candy bar? Do I want an eighteen-pack of beer or six-pack of beer?”

Higher gas prices also mean more problems outside, at the pumps. For starters, theft.

SETHI: Most tanks are not locked, because deliveries come at night. So, you got these people, they have 3-, 400-gallon plastic tank in their truck, pickup truck. Two, three in the morning, pitch dark, they’ll come with a hose, open your tank, and they will take over 3-, 400 gallon gas. So you could lose a couple thousand dollars worth of gas in those two, three hours. It has been happening quite more often than ever before.

And those price wars between stations? Well, they get worse, too.

GOLDING: They are really in a cat and mouse game with each other on who raises prices slowest. Because as the pump prices go up, consumers are going to go to the station that is 3 cents cheaper. It’s not a great environment for those operators right now at all.

Rising fuel prices are not great for business. But beyond that, station owners are facing a bigger problem — one that represents an existential threat to their livelihood: Electric vehicles. Sure, today EVs only make up around 1 percent of all cars on the road. But nearly half of consumers say they would consider buying one in the near future. For station owners, installing EV chargers involves ripping up pavement and laying down cables. And the cost can run upwards of $100,000. That’s a lot of ice bags.

GOLDING : The billion dollar question here for the service station owners is … how aggressive do you get with investment in something that is going to take a few years to really have a broad customer base.

Some station owners are waiting to suss things out a bit. Others, like Kai Trimble Lea, plan to install electric chargers soon.

TRIMBLE-LEA: I can tell you we will have two coming in, I would say, within the next year.  You know, you have to be realistic with what the future is entailing, so you better try to be a part of it.

For now, there’s at least one silver lining for gas station owners — as J.P. Sethi discovers when his own car is running low.

SETHI: I usually go to my own store, pay my own gas. 

CROCKETT: That must be nice. 

SETHI: At least I can make 30 cents a gallon.

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For The Economics of Everyday Things, I’m Zachary Crockett. This episode was produced by Sarah Lilley, and mixed by Jeremy Johnston, with help from Greg Rippin, Emma Tyrell, and Eleanor Osborne. Our executive team is Neal Carruth, Gabriel Roth, and Stephen Dubner.

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And this is Stephen Dubner again. Big thanks to Zachary Crockett for taking us on this maiden voyage of The Economics of Everyday Things. We will play another episode for you next week. And if you want to make sure that you never miss an episode, go ahead and follow, or subscribe, in your podcast app to The Economics of Everyday Things, from Freakonomics Radio Network. Again, please let us know what you thought! Our email is radio@freakonomics.com. In the subject line, write “Everyday Things.” We will be back very soon with a regular episode of Freakonomics Radio. Until then, take care of yourself and, if you can, someone else too.

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TRIMBLE-LEA: You know what? I don’t have any gas station friends! I’m going to have to go make some gas station friends. You’re going to motivate me to go find one!