Costco And Walmart Hope to Draw Customers in With Cheap Gas

Big-Box Retailers Limited Profits From Gas Sales

Gas prices are exploding. This is driving more people to big-box retailers like Costco (COST) and Walmart (WMT) where fuel is relatively cheap. The retailers use inexpensive gas both to reflect their low-cost image, and to expand their customer base. The low margins on fuel, however, make profits elusive, and in times of rising oil prices, may even lead to losses.

While fuel represents only about 10% of these retailers’ revenue, the hope is that customers will make the trip to these often out-of-the way supercenters to buy cheap gas, and then buy other products while there.

Why Gasoline Is So Expensive

When the pandemic triggered stay-at-home rules, demand for oil plummeted along with people’s need to drive. Oil producers responded and cut production, reducing global supply by about 10%. As COVID-19 restrictions began to ease, production was slow to ramp up. Add the supply constraints initiated by the Russia-Ukraine war, and you get a supply-demand imbalance that is showing up in today’s high prices.

Although Russia supplies only 10% of oil imported by the US, domestic prices are affected by the global market. Russia accounts for around 10% of the world’s oil supply.

What to Expect

In general, the double troubles of rising oil prices and high inflation are zapping consumers’ buying power. Some market observers expect the Russia-Ukraine war to continue to push oil prices higher at least through April, if not longer. Consumers may want to brace themselves for the possibility that high prices will continue for months.

Consumers may want to buckle up and brace for pain at the pump, as the national average could get as high as $5 or even $6 a gallon. Household budgets will take a hit as that expensive gas keeps people — and products — moving.

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