Will That Be Cash or Credit?

It wasn't too long ago that I was wondering why gas stations still had dual signs for cash and credit posted at the pump, since the prices were always the same. These days, I've been noticing the reason why: Stations are offering customers a big discount if they fill up with greenbacks.

These discounts aren't insignificant. You can find a price discrepancy of as much as $0.10 a gallon. To paraphrase Sen. Everett Dirksen, a dime here and a dime there -- and fill up enough times -- and soon you're talking real money.

Particularly when a gallon of gas was over $4.00, I wonder how many motorists realized they were paying a higher tab for using plastic. When it cost $75, $100, or more to fill your tank, did anyone really carry that much cash in their pockets?

As tempting as it might be to blame the gas station owner for what might seem like gouging, credit cards eat into the already slim profits that gas stations produce.

According to some estimates, credit cards are used in 80% of all fuel pump transactions. But several sources cite merchant agreements with credit card servicers Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) and banks like Bank of America (NYSE: BAC  ) that typically include a 2% fee for stations, with a 3% fee for American Express (NYSE: AXP  ) . As a result, station owners aren't reaping millions. According to the Petroleum Marketers Association, station owners scrounge up between $0.03 and $0.15 in profits per gallon sold.

ConocoPhillips led off the big profits parade last week when it reported that earnings had surged 41% over the year before, while Foolish wag David Lee Smith suggested BP (NYSE: BP  ) actually stood for "Big Profits," as its earnings soared 83% over the year before. So even though pump prices move up and down with the cost of a barrel of oil -- eventually -- the flow of profits takes a more circuitous route.

The federal Energy Information Administration says retailers and wholesalers account for about 8% of the total cost of gasoline, while refiners like Valero (NYSE: VLO  ) get another 14%. Uncle Sam and state and local governments get an 11% cut. That leaves about two-thirds of all money going to oil producers: industry giants like ExxonMobil (NYSE: XOM  ) and countries like Saudi Arabia, Venezuela, and Russia.

If you still want to use plastic instead of carrying around the equivalent of a second mortgage in your pocket each time you want to fill up your gas tank, you might consider a gas card. Many offer rebates that exceed what you'd save by paying cash. Just make sure you pay the bill in full every month, or the interest will far outweigh the extra pennies it would have cost you at the pump.

Even though gas prices have come down significantly in recent months -- I saw a station selling regular gas for $1.99 a gallon the other day -- filling up the family car can still give you an ugly jolt. But paying cash can end up saving you a pretty penny.

Bank of America is a Motley Fool Income Investor newsletter selection. American Express is a Motley Fool Inside Value pick. The Fool owns shares of American Express. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 30, 2008, at 2:13 PM, rb7385899 wrote:

    so, i get a 10cent per gallon discount for using cash.

    but i accrue rewards for using my credit card. plus i'd have to pay a fee for using the ATM. then there's the gas it takes to drive to ATM, and the fact that it reduces my checking account balance about a month ahead of time, leading either to lower checking account interest or possibly not meeting my minimum balance and having to pay higher fees. plus with my credit card i get an itemized statement - both online and paper - to review and record my purchases at any time.

    geez motley fool . .. did you ever encounter the phrase "pennywise and pound foolish"?

    guess not

  • Report this Comment On January 25, 2009, at 3:49 AM, Seattle1 wrote:

    I love my gas credit card - I found it at www.plasticapproval.com. But now that the gas prices have come down a bit, I dont use it as much. I use cash when I can, but its still great to have a gas credit card too.

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