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Why high gas prices are ‘a huge boon’ to Costco, analyst explains

GasBuddy Head of Petroleum Analysis Patrick De Haan joins Yahoo Finance Live to discuss oil and gas prices, why consumers flocked to Costco and other wholesale clubs for gas, and how a mild recession would impact gas purchasers.

Video Transcript

JULIE HYMAN: Gasbuddy head of petroleum analysis Patrick De Haan is with us. Patrick, I follow your Twitter feed very closely to find out what's going on with those gasoline prices. How much has the past year affected the flow of where people were buying gasoline?

PATRICK DE HAAN: Well, as we saw gas prices explode this year, motorists were penny pinching everywhere they could. And as you mentioned, Costco and wholesale clubs have generally been very aggressive on pricing on gasoline. And so when the national average exploded to $5 a gallon, consumers flocked to save any couple pennies they could. And with frequency, that took them to wholesale clubs like Costco, very price aggressive and having the lowest price.

And as you cite, motorists, when they're at the location, often will go inside. So it's a huge boon to Costco. When prices go up, Americans become much more price sensitive, and wholesale clubs like Costco are very much the leaders in having and bringing down prices the most. And that's where a lot of this traffic went. It wasn't necessarily a shift in gallons-- away from gallons. It wasn't necessarily a drop in consumption, but many Americans routed their purchases to the more aggressive retailers, like the wholesale clubs.

INES FERRE: And Patrick, how are they able to be so aggressive? Because I'm seeing some figures that they can sell fuel around $0.20 to $0.30 less per gallon than regular gas stations. But is this volume driven?

PATRICK DE HAAN: Well, it is somewhat the power of economics. Certainly, refiners would love to sell to a massive chain like Costco, where volume is off the charts. It's a great way to get those barrels and those gallons to the market. At the same time, Costco has a different strategy. Because it has attached clubs where margins are improved, they have a different strategy of getting people to the location with a very low price.

Then, as you mentioned, many of those that are filling their tanks will go into Costco, where margins are improved. So when gas prices are very high, you get more people going to Costco to fill their tanks. That also means more volume, more foot traffic into the wholesale clubs that are attached.

BRAD SMITH: If we do see a mild recession, as some bank executives or even economists are calling for right now, do you believe that there will be any significant shift in how consumers are purchasing their gas, where they're purchasing their gas, and what that means for the sellers of that gas, like a Costco, too?

PATRICK DE HAAN: Well, I think as prices have been plummeting, Costco's have been well out ahead of much of the competition in most areas. Maybe not every area, but a lot of the wholesale clubs have been extremely aggressive. I've seen several times here GasBuddy watching prices fall where some of the wholesale clubs, whether it's Costco or someone else, could be $0.25 to $0.35 a gallon less. That's a very strong argument to go to those locations to fill up.

Now, as stations are passing along those discounts, Costco can maintain the advantage by being the aggressive retailer in lowering prices first. But when prices eventually stabilize, they may not stand out quite as much. So with stability, with prices relatively low at most retailers, that's maybe not as conducive for Costco to win necessarily on volume. But at least for the next several weeks, going into the closing innings of the year, with prices plummeting, I think the wholesale clubs will maintain that benefit of volume.

INES FERRE: And Patrick, we have seen prices tapering when it comes to gasoline. Where do you see prices going as we go into the holiday season and into the new year?

PATRICK DE HAAN: I think there's still additional downside. Oil prices are still failing to find traction, even amidst all of the news. The EU price cap on Russia, sanctions on Russia have really failed to propel oil prices higher. Of course, a lot of that may be because of, on the other side, China's lockdown and COVID protocols are reducing demand in China.

So for now, I see more downside potential. The national average at 3.34 today, finally below its year ago levels for the first time in almost 670 days. That trend of falling prices will likely continue for a good portion of the rest of the year with the national average potentially falling below $3 by Christmas.

JULIE HYMAN: Patrick, thanks so much. Appreciate it. GasBuddy head of petroleum analysis, Patrick De Haan, I will continue to keep an eye on your Twitter.

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