Gasoline is an inelastic product because as the price of gasoline increases, the demand does not decrease significantly as there are very few good substitutes for gasoline. An important aspect of oil demand is the difficulty of substituting other sources of energy for some petroleum products—particularly gasoline. In the immediate term at least, gasoline has virtually no cost-effective substitutes, and, therefore, increases in its price cause only small decreases in consumption. (The Government Accountability Office, 2017) Consumers are still willing to buy gasoline at relatively high prices.
The inelasticity of gasoline and the profits from convenience store sales can attract a number of entrepreneurs to invest in gas stations. While American…show more content… Energy Information Administration, based on Federal Reserve Bank of St. Louis
Note: VMT is vehicle miles traveled. Per capita figures reflect U.S. population age 16 and over. Vehicle miles traveled figures are 12-month rolling averages
Contrary to popular assumptions, gas stations do not realize large profits from the sale of gas. According to NACS, “profits are pennies per gallon at the pump, and a store usually makes an average of about 30 cents total on a fill-up. Gross margins (the markup before expenses are factored in) on gasoline have averaged 20 cents per gallon (7%) over the past five years.” (NACS The Association for Convenience & Fuel Retailing, 2017). Fuel margins are slim because of consumer price sensitivity. Most consumers (61%) say that price is the most important factor in determining where they buy gas. The percentage of customers who say price is the most important factor has stayed fairly consistent since…show more content… The supply of gasoline is determined by many things including the demand, price of the gas, the price of inputs, the technology used. One of the main determinants of supply is also the production cost. The implication of this is that the profits will go down if the cost of production increases. On the flip side, there will be profit maximization if the production cost is lowered. Oil demand includes demand from most of the world’s nations yet the countries that supply most of the world’s oil are few in quantity as they are the countries that have the highest oil reserves and production. Petroleum suppliers are grouped into two categories Members of the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC countries. “OPEC currently has 11 members, and many of its major producers are located in the Persian Gulf region. Key non-OPEC producers include Russia, the United States, China, Mexico, Norway, Canada, and the United Kingdom. Non-OPEC countries, including the United States, have typically contributed the majority of the world’s oil supply since the 1970s. Over the same period, the U.S. share of total world supply has decreased from about 23 percent in 1970 to about 10 percent in 2004. In 2004, the United States imported about 13 million barrels of crude oil and petroleum products per day, representing about 60 percent of total U.S. consumption.
