Rack reversal occurs when gas and oil prices rise, causing independent gas station owners to pay high wholesale prices for gas, leading to price increases for consumers. Independent traders buy spot gasoline at a discount, but scarcity and rising crude oil prices can cause rack reversals. Independent operators may supplement revenue with attached convenience stores to recoup potential lost profits.
Rack reversal is an industry term for a phenomenon that occurs when gas and oil prices rise dramatically, charging independent gas station owners extremely high wholesale prices for their gas. Typically, independent operators pay significantly less for gas than their branded counterparts, allowing them to sell that gas at a discount. When a cogwheel reversal occurs, they are forced to pass the price increase on to consumers, meaning their prices rise dramatically; in the extreme, rack reversal means independent operators pay nearly as much wholesale prices for gas as consumers do at branded stations at the pump.
This term refers to the way gasoline is sold to independent traders. They buy what’s known as “spot gasoline,” gas that has been sold by refineries to fuel companies and distributors so they can blend it and sell it to other operators. Typically, spot gasoline is sold to branded operations first, and then independent operators buy the surplus at a discount. The amount of this rebate varies, with independent operators paying so-called “rack prices” for their gas.
Several factors can lead to a rack inversion. One factor is scarcity, which can be caused by a wide variety of things, from natural disasters to a conscientious effort to reduce excess gas production by refineries. Rack reversals can also be caused by rising crude oil prices, which can cause prices to fluctuate wildly, not just from day to day, but even multiple times in the course of a single day. This can be a nightmare for independent traders, who in turn would be forced to raise their prices throughout the day to make up the price difference.
When a cogwheel reversal occurs, name-brand gasoline prices tend to stay a bit more stable, because they’re often priced bargain. While their prices will go up, a steady rate of upside is common and prices may be less likely to change throughout the day. As a result, independent operators may be starting to feel the pinch as they struggle to cope with rising spot fuel prices. Consumers can also be won over by name-brand stations, sensing huge price differences, and this can force independent operators out of business if rack inversion is prolonged.
To deal with the possibility of rack reversals, it is common for independent stations to supplement their revenue with attached convenience stores and other services, in hopes of recouping potential lost profits by encouraging station visitors to purchase other things. In some cases, the station may make a loss on gasoline sales to lure customers in the door, in hopes that they will buy snacks or miscellaneous supplies sold by the station owner.
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