Curious Iowa: How are gas prices determined?

How is it that two convenience stores across the street from one another can have different gas prices? And why can one town’s gas pumps have consistently higher prices per gallon than another town in the same county?

That’s what Mount Vernon resident Bob Campagna wondered. He sent an email to Curious Iowa — a series from The Gazette that seeks to answer Iowans’ questions about the state, its culture and the people who live here.

Campagna used to work as a delivery driver, and while driving on the eastern half of the state, he noticed “Sometimes individual Casey’s within a few miles of each other would vary by 10-20 cents. Specifically, quite often the gas prices at Casey’s in Cedar Rapids will be less than Mount Vernon.“

Campagna asked Curious Iowa how Casey’s determines its prices and why prices vary among Casey’s stores at nearby locations. The Gazette spoke with experts to find out how gas prices are set.

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Higher oil prices raise gas prices

Transportation costs and store location contribute to the price of gas but the biggest factor is oil, which makes up about half of the price of gas.

Jeff Lenard, a spokesman for the National Association of Convenience Stores (NACS) explained, “There are 42 gallons in a barrel of oil. So if you’re looking at the oil markets and you see oil go up or down by $1, that equates to about 2.4 cents per gallon. If oil goes up or down $10, that’s about 24 cents per gallon and that’s probably something that you see reflected at the pump.”

ISU economics professor Chad Hart said conflicts overseas may contribute to spikes in oil prices, and subsequently gas prices, due to uncertainty around product flow. Attention is placed on “which oil producing countries are aligning with which countries and which will they continue to ship to through such a conflict,” Hart said.

For example, take Russia’s invasion of Ukraine on Feb. 24, 2022. Russia is a top oil exporter and the U.S. responded with economic sanctions while the UE imposed a price cap on Russian oil. The oil market reacted to uncertainty around meeting global oil demands and on June 14, 2022, the national average price for a gallon of gas in the U.S. hit a record of $5.02. The U.S. saw a four-decade inflation high that month, with the Midwest experiencing inflation worse than the national average.

“Anytime we see gas prices going up, diesel prices going up, that influences all the prices we see on the grocery store shelves, the convenience store shelves and everywhere because you know that that transportation cost of moving that product has to be factored in,” Hart said.

Store location can impact gas prices

Beyond oil prices, a gas station’s location plays into the price it charges for gas. The price often includes factors like how much it costs to transport gas to the station and where the closest competitor is located.

“Most people don’t like taking a left-hand turn, so it usually is that the store on the same side of the street is more likely to be considered competition than one directly across the street,” Lenard said. “One may get the flow in the morning; one may get the flow in the evening. It’s almost an entirely different customer set.”

Marion resident Ginny Henry and Cedar Rapids resident Lynn O’Connell said they watch gas prices and use Hy-Vee fuel saver cards.

“I rarely want to pick it up,” Henry said.

“If I’ve got to go out of town I always get it here before I leave because I know it’s gonna be more expensive when you go,” O’Connell said.

“And you’re not sure what the price is gonna be when you go someplace else.” Henry finished.

On Nov. 27, The Gazette noted the posted gas prices at a number of gas stations in and around Cedar Rapids. The highest price was $2.94 per gallon at the Mount Vernon Casey’s, 323 Business 30 SW. The lowest price was $2.69 per gallon at the Cedar Rapids Fleet Farm Gas Mart, 4650 Cross Pointe Blvd. NE. Notably, the Fleet Farm Gas Mart is on the same side the street as nearby Casey’s, 5555 Edgewood Rd. NE, which was selling gas for $2.89 per gallon.

A majority of the gas stations The Gazette surveyed were selling gas for $2.89 per gallon. That day, AAA reported that the Iowa average was $2.87 per gallon while the national average was $3.25 per gallon.

Lenard said the National Association of Convenience stores has conducted consumer surveys for about two decades on what people would do for cheaper gas. The surveys asked what a consumer would do to save five cents on a gallon. Would you pay by cash instead of card? Drive five minutes out of the way? Drive 10 minutes out of the way?

“People say roughly 30 to 40 percent would do that action. Now, this is what they say, not necessarily what they do,” Lenard said. “In general, people are always concerned about gas prices and are more likely to say that they would go further out of their way. But then you come into the daily grind of life and sometimes it’s just not worth it to go five minutes or 10 minutes out of your way.”

Prepared food boosts convenience store sales

Lenard said convenience stores are responsible for about 3 percent of the GDP in the U.S., “largely because of gas sales but also increasingly because of in-store food sales, particularly Casey’s with pizza.” The NACS reported that in 2022, convenience store sales topped $300 billion, noting that prepared food made up 67.3 percent of all food service sales.

Hart said gas is sometimes used as a loss leader. This means a gas station is willing to take a loss on gas sales to get customers inside the store to buy food and convenience items.

“Most retailers make maybe 10, 15 cents a gallon on a fill up,” Lenard said. “So you’re looking at maybe $1, $1.50 for a fill up in profit. They can make much more on a sandwich, on a pizza, on even an upscale coffee.”

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For O’Connell, it’s bananas that bring her to Kwik Star.

“Their bananas are the best in town — and the best price in town — but they just taste better,” O’Connell said. “So sometimes I’m like, OK, I’ll get my bananas today and my gas.”

A variety of factors — oil prices, transportation costs and store location — can impact what you pay at the pump, but gas stations are willing to shrink their margins to stay competitive.

“There is no commodity where consumers are more price sensitive,” Lenard said. “They say they will go out of their way for just a few cents a gallon and go somewhere else so, you don’t wanna be out of line when you have a lot of competition, but even when you don’t have a lot of competition, you want somebody to feel that they’ve gotten a good deal.”

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Comments: bailey.cichon@thegazette.com