As three Michigan gas stations aggressively battled for customers last week in an all-out price war, sending gas prices down to 47 cents per gallon—just pennies above the federal and state excise taxes—police had to step in to direct traffic, and Americans demonstrated just how serious they are about filling up for next to nothing.
The pricing war was instigated in Michigan’s resort town, Houghton Lake, by B&B Market, which has long had an MO of undercutting the competition by a penny, and a Valero station, which had reopened under new ownership the week prior and made its debut by meeting the competition’s cuts penny by penny. Related: Oil Crash Only The Tip Of The Iceberg
The penny cut price war continued on 17 January until cars were lined up in 45-minute waits and police had to be brought in to deal with the congestion.
A nearby Citgo station also took a shot at joining the price war, but managed to hold fast at 95 cents per gallon—a figure that was still significantly lower than the average price for that area.
As cooler heads prevailed, prices climbed Sunday evening, eventually reaching a more sensible $1.48 per gallon. Related: Saudi Aramco Chairman Talks Oil Down
On that day, the consumers were the only winners—kind of. What with the average car holding only 14 gallons of gas and consumers spending about 45 minutes idling in line, they wasted about three-quarters of a gallon of gas and 45 minutes of their time to save, at most, $14.00. We would be hard pressed to consider that much of a win.
The gas stations were the biggest loser. Privately owned gas stations typically have the narrowest profit margins in the business, and the average gas station only keeps about 7 to 10 cents of each gallon of gas—at normal prices. And that’s not profit—that’s without payroll, lease, and other operating expenses. So when gas stations drop prices to less than 50 percent of the average, it is clearly unsustainable. It’s safe to say that on that day, all three stations were operating at loss—and probably a big one.
It’s no surprise that the war was short lived, and price wars of this magnitude are unlikely to be the rule of the day. This was a marketing gimmick—one that got a bit out of hand if you were to ask the police. Related: How Soon Could A Sustained Oil Price Rally Occur?
Will it resonate? Perhaps, for a short while; but Americans are notorious for finding out where gas is cheapest. They even use new GPS navigation systems for live gas pricing while driving.
But even without cut-throat price wars, Michigan residents should revel in the fact that gas prices in the state are the fifth lowest in the nation, with prices dropping 13 cents per gallon two weeks in a row, according to AAA, to an average of $1.60 per gallon, and the lowest Michigan gas prices in the capitol city area, where they hover around $1.47 per gallon.
By Julianne Geiger of Oilprice.com
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