Is All Gas The Same?

It's Sunday, August ninth. I'm driving back from the Redwoods today, and somewhere along the 101 I'm going to stop for gas, and it's going to cost me significantly more than it would cost someone filling up in Texas or Mississippi for the exact same thing. California's average gas price right now is about $5.88 a gallon, partly because of the Iran situation driving global oil prices up, but California has been the most expensive state for gas long before any war started. I've always just accepted that as the cost of living here without really understanding why, so on the drive back I started thinking about how gas pricing actually works, and the deeper I went, the more I realized I didn't understand the basics: why California specifically is so much more expensive, whether the gas at a cheap station is actually worse than the gas at an expensive one, and how gas stations make money at all when the margins on fuel are as thin as they apparently are. The simplest explanation for why California gas costs more is taxes, but even the tax story is more layered than most people realize. About 90 cents of every gallon you buy in California goes to a combination of state excise tax, cap-and-trade fees, and federal tax. The state excise tax alone is about 60 cents per gallon, the highest in the country. On top of that, California's cap-and-trade program, which puts a price on carbon emissions, adds roughly another 20 to 30 cents per gallon. For comparison, Alaska's combined tax is about 27 cents. That tax gap alone explains a big chunk of the price difference.

But taxes aren't the whole story. California is what the industry calls a "fuel island." The state has no major pipeline connecting it to the refining centers along the Gulf Coast, which means it relies almost entirely on its own refineries and imports by tanker to meet demand. In the 1980s, California had 43 active refineries. Today it has about 7, serving 39 million drivers. When one of those refineries goes offline for maintenance or has an unexpected outage, there's no easy way to bring in replacement supply from elsewhere, and prices spike fast. The rest of the country can shift supply through a network of pipelines. California can't, which means every disruption hits harder and lasts longer here.

And then there's the gas itself. California mandates a special cleaner-burning gasoline blend called CARBOB (California Reformulated Gasoline Blendstock for Oxygenate Blending), which is designed to reduce smog-forming pollutants. It works, California's air quality has improved significantly since the blend was introduced in 1996, but it costs 10 to 15 cents more per gallon to produce than conventional gasoline, and because no other state uses it, California can't just import cheaper gas from next door when supply runs short. Here's the part that changes how you think about the gas station you drive past every day: the average profit margin on a gallon of gas is about 10 cents. Ten cents. At a gas station, fuel sales account for about 67 percent of total revenue but only 39 percent of total profit. The gas is a loss leader. It gets you to pull in, and once you're there, the business model assumes you're going to walk inside and buy a bottle of water for $2 that cost the store 20 cents, or a bag of chips for $3 with a 50 to 60 percent margin, or a coffee that costs pennies to brew and sells for $1.50.

The gas station is a convenience store that uses fuel to generate foot traffic. It's the same model as the Delta rewards program we covered a few weeks ago: the thing you think is the product is actually the hook that gets you to the real product. The airline's real business is selling miles to banks. The gas station's real business is selling you Doritos and energy drinks at a 60 percent margin while you wait for your tank to fill.

This is also why gas prices vary so much even between stations that are a block apart. There's no regulation on what a gas station can charge for gas. Two stations on the same street buying from the same wholesale distributor can charge different prices based on their location, their rent, their competition, and their business strategy. A station on a highway exit with no competitors nearby can charge 30 to 50 cents more than a station in a competitive urban area, and there's nothing stopping them.

And the quality question that everyone asks, whether cheap gas is worse than expensive gas, has a straightforward answer: all gasoline sold in the United States has to meet EPA standards regardless of brand. Most gas in any given region comes from the same handful of refineries. The difference between Shell, Chevron, and the cheap independent station down the street is mostly the additive package, a few cents' worth of detergent additives that the brand mixes in at the distribution terminal. Costco gas comes from the same refineries as everyone else. They just accept razor-thin margins on fuel because gas is a loss leader that drives membership renewals and gets you into the warehouse where you'll spend $200 on bulk groceries. Same gas, different business model. The price on the sign outside the gas station is the end point of a chain that starts with crude oil, and the lag between what happens in the global oil market and what you pay at the pump is longer than most people realize.

When something disrupts supply, whether it's an OPEC (Organization of the Petroleum Exporting Countries) production cut, a war in an oil-producing region, or a refinery outage, the effect doesn't reach your local gas station for about four to six weeks. Crude oil has to be extracted, shipped to a refinery, processed into gasoline, transported by pipeline or truck to a distribution terminal, and delivered to the station. Each step takes time. So the price you're paying today reflects decisions and events from a month or more ago, and the events happening right now won't fully show up at the pump for weeks.

The Iran situation is a good example. The conflict has been pushing global oil prices up for months, and California is feeling it more than most states because of the fuel island problem, every price increase is amplified by the state's inability to quickly source alternative supply. Americans spend an average of about $2,000 to $3,000 per year on gasoline, and for Californians that number runs higher because the per-gallon cost is consistently $1.50 to $2.00 above the national average. Over the course of a year, that's an extra $1,000 or more just for living in a state that decided its air should be cleaner and its gas should be taxed to fund climate programs, both of which are defensible policy choices that happen to cost you real money every time you fill up.

I'll stop for gas somewhere on the 101 in a couple hours, and it'll probably be at whatever station is closest to the highway because when you're running low you're not price-shopping, which is exactly what the station owner is counting on. The location premium, the convenience markup, and the 10-cent fuel margin all lead to the same conclusion: the gas station business is about where you are when you need gas, not about gas itself. Driving back from the Redwoods through $5.88 per gallon gas, I keep thinking about the 10-cent margin. The station makes almost nothing on the fuel and everything on what you buy inside. The price on the sign is the end of a six-week supply chain that starts with crude oil on another continent, and California pays more than everyone else because of cleaner gas, higher taxes, and a refining system that can't borrow supply from anywhere when something goes wrong. The gas in the cheap station is the same gas in the expensive one, just with a different sticker on the pump.

Stay informed, stay curious, and we'll see you tomorrow.