August 31, 2005

Dear Gas Station Guys:

Filed under: Uncategorized — Jim @ 7:45 pm

I know that many of you take a lot of heat from customers who are angry about the high gasoline prices and blame you for them. This is, of course, unfair to the extent that your retail prices reflect your increased cost of the gasoline. However, many of you received your gasoline deliveries well in advance of the damage caused by Hurricane Katrina and yet you have raised your prices on that same gasoline that is still in the ground two or three times since Monday.

Maybe you did that because the gas station across the street raised its prices, and maybe you did it because you’re just trying to make a killing. Either way, I will remember who you are when things calm down.

12 Comments »

  1. Come on, Jim. You know price isn’t strictly a function of cost. If that were the case, we’d pay about 20 cents for a gallon of bottled water and you don’t hear everybody complaining about that. The law of supply and demand doesn’t give a hoot about when the guy bought the gas or for how much he bought it. The fact that there are people willing to pay that much dictates how much he can charge. If he doesn’t sell any at that price, his price will come down. Absent collusion, he should be able to charge whatever he can sell it for, no?

    Comment by Dash — August 31, 2005 @ 10:07 pm

  2. Absolutely. He can sell it for whatever he wants (I am absolutely opposed to price controls), and if I have to I’ll buy it at his inflated price. However, when things get back to “normal” I will be more likely to buy from the guy who didn’t raise the price of gas that that was already in his underground tanks before the hurricane hit.

    Comment by Jim - Parkway Rest Stop — August 31, 2005 @ 10:26 pm

  3. Jim I have been in business for myself so I remember from painful experiences the choices these guys face.

    Ok the difference between what you pay for something and what you sell it for is your profit. That is your salary, what you get to
    buy food and pay mortgages with etc.

    Less taxes and liscence fees and state mandated insurance fees and state fees. etc ad naseum.

    With me so far? Sounds simple and leads to the consumer reaction “They don’t have to raise it so high they are GOUGING!”

    But you over look one little detail, when his tanks are empty he has to fill them back up.

    What happens if the new gas costs more than he sold the old gas for?

    Chapter 11. He has not only not MADE any money to buy food etc etc, but now he OWES money.

    How many of y’al would want your income to be based on those types of gambles??

    In a stable retail environment it’s not too bad but one in flux? Guess one way your customers get ticked off at you, the other way you lose everything. Not too fun.

    Comment by Dan Kauffman — September 1, 2005 @ 12:15 am

  4. There was a lot of airtime on NJ 101.5 this morning regarding price gouging. I heard that gas WILL go over $4/gallon. That totally sucks. Paul drives 90 a day to and from work.
    ::sigh::

    Comment by Kate — September 1, 2005 @ 10:18 am

  5. Dan,

    Uhh, I’m not following your logic here. So you’re saying that we’re paying for what the business owner *thinks* it’s going to cost to resupply? I’m not sure what kind of business you were in, but generally you purchase goods at price X, add overhead/costs/profit Y to come up with your price Z. Then after you’ve sold your goods, you do it all over again. You already made your profit. If you are depending on the profit of the sale of the goods to resupply, then you have a cash-flow problem and are not managing your business well.

    In gasoline sales (and other commodity-based businesses) you are generally allowed to charge ‘market prices’. This is *supposed* to cover you in the fluctuations of prices. One month you’ll be selling way over what your price point is (making lots of money), another month you might be selling below your price point (losing money). In commodities, the fluctuations usually average out in the long run. But with gas, can you remember the last time prices went down?

    What’s happening now is simply profiteering.

    Cheers,
    Ed T.

    Comment by Ed Tapanes — September 1, 2005 @ 2:59 pm

  6. Dan,

    Uhh, I’m not following your logic here. So you’re saying that we’re paying for what the business owner *thinks* it’s going to cost to resupply? I’m not sure what kind of business you were in, but generally you purchase goods at price X, add overhead/costs/profit Y to come up with your price Z. Then after you’ve sold your goods, you do it all over again.
    *************************************************
    I know it’s confusing that is why I now prefer getting a paycheck,

    OK you are QUITE correct. Normally that is how it works,
    Now tell me when you go to do it over again what if X now equals the Old X plus Y and even more.

    If you fill back up again how much have you made?
    If the Price takes a SUDDEN jump you can be in a bind, you CAN hang in there for minor fluctuations. In my limited experience petroleum products are the worst. Back in the day, my Father had a little Farm Store, During the Gas Price jumps in the Carter administration it was almost impossible to figure out what to price those products.

    Being a City Fella you may not be familiar with Chainsaw Oil, it comes in little cans you mix it with Gas. Almost EVERY time we would sell out and get more in. It COST more than we sold the last batch for. We did not make a penny off that stuff until things settled down.

    Now your guys may be gouging, but most of those folks don’t really make much money on Gasoline, they make their living on the other stuff inside,
    *************************************************
    I buy gas for 100K say that is a weeks supply I sell for 102K but if the price jumps 10% I now have to pay 110K to restock, OOPS I only took in 102K last week I am now 8K in the hole.

    I need to now sell that new tank for 114K if it doesn’t go up anymore I still make 2K a week after I fill back up at, 110K, if it goes up to say 115K? I am now 1K in the hole and I have not made a red cent for two weeks, how long can you do that before you go belly up?

    You can see now why I prefer a pay check?

    But let us put this in the perspective of someone who DOES get a paycheck, suppose instead of the check you expected you got a bill? Not only did you not make any money this week, but they wanted what you made last week back?

    Comment by Dan Kauffman — September 1, 2005 @ 6:07 pm

  7. Hehe, I’ve been called a sh**y f***er before, but never a city fella. :-) And yes, even us city fellas use two stroke engines occasionally.

    You’re still talking about cash flow. Can we agree that if you buy and sell something, that the purchase and then sale of it completes a cycle? And then by purchasing another batch and selling that completes another cycle, and so on, and so on. Simple accounting contends that GROSS PROFIT is equal to REVENUE (sales of goods) minus COGS (Cost Of Goods Sold). The IRS agrees with this.

    “I buy gas for 100K say that is a weeks supply I sell for 102K but if the price jumps 10% I now have to pay 110K to restock, OOPS I only took in 102K last week I am now 8K in the hole.”

    No, you’re not 8K in the hole, you made 2K in that cycle.
    Total sales –> $102K
    COGS –> $100K
    Gr Profit –> $2K

    The next sales cycle will be based on a different COGS, in your example, 110K. Then assuming the same 2% profit margin, will be sold for 112.2K for a profit of 2.2K.

    As someone who writes the paychecks, I’m intimately familiar with this cycle. And yes, I much preferred receiving paychecks. :-)

    Cheers,
    Ed T.

    Comment by Ed Tapanes — September 1, 2005 @ 7:50 pm

  8. Last night, I watched the manager of a new gas station in town as she was fighting off tears. She was getting so much crap from all of the customers that she was seriously thinking of quitting.

    She got her orders to raise to a certain price, and she did… unfortunately, hers was the first station to do that by about three hours.

    Comment by That 1 Guy — September 1, 2005 @ 10:37 pm

  9. No, you’re not 8K in the hole, you made 2K in that cycle.
    Total sales –> $102K
    COGS –> $100K
    Gr Profit –> $2K
    *************************************************
    You need $110 to restock normally the restocking expense is LESS than the Gross Sales, when Cost Jumps way above prior Gross Sales you have a problem.
    *************************************************

    The next sales cycle will be based on a different COGS, in your example, 110K. Then assuming the same 2% profit margin, will be sold for 112.2K for a profit of 2.2K.
    *************************************************
    Where did you get the extra 10K for your Cost of Goods? and if the same thing keeps happening for a few weeks where are you?

    Comment by Dan Kauffman — September 2, 2005 @ 2:30 am

  10. Maybe my perspective is influenced by having my own roadside nursery business at one time.

    I bought flowers, shrubs, potting soil etc, sold them restocked and the difference between what aI sold and what I paid, was what I lived on.

    We agree so far, BUT from PERSONAL experience which is why I much prefer testing and tuning landing systems for a Government contracter,

    WHEN the prices started going up to more than I sold my previous wares for during shortages, I made NO money, darn near starved to death, before I got this job.

    That’s the difference between theory. and “well I paid the venders, now do I have any money left to eat on” learning.

    It is so easy to say “well you start another cycle” so you can take your 2K out and sell the next batch for a higher price. You have to GET the extra money from somewhere to restock.

    Comment by Dan Kauffman — September 2, 2005 @ 2:37 am

  11. Dan,

    I think the perceived difference here is scale. A mom and pop type of operation will often collect from Peter to pay Paul. With this world-view you perceive a loss when in fact, there is none. You ask where the extra money to pay for the new increase in price comes from and the answer is your pocket (but this money will be made back upon selling of the goods). This is, in effect, a cashflow issue, not an issue of profit or loss.

    Cheers,
    Ed T.

    Comment by Ed Tapanes — September 2, 2005 @ 4:16 am

  12. I spoke with our fuel supplier this morning. He is pulling his hair out, too. We have a 1000 gal diesel tank & a 500 gal unleaded tank to fill. It’s a bit hard to farm without it. We didn’t raise enough oats this year to purchase more horses.

    Our friend (yes, he really is!) told me that yesterday he was guaranteed fuel at a certain price. When he got to the bulk plant – there was NO fuel. Today he can get fuel there from Cenex – at a higher price than the Sinclair price. On Sunday, he can get fuel from Sinclair at a lower price.
    The kicker – it’s the SAME fuel. But on Sunday, he can purchase it from Sinclair.

    Comment by moos — September 2, 2005 @ 1:21 pm

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