Rack inversion is an industry term for a phenomenon which occurs when gas and oil prices rise radically, causing independent gas station owners to be charged extremely high wholesale prices for their gas. Normally, independent operators pay significantly less for gas than their branded counterparts, allowing them to sell that gas at a discount. When a rack inversion occurs, they are forced to pass the price increase on to consumers, which means that their prices rise radically; in extreme cases, the rack inversion means that independent operators pay almost as much in wholesale prices for gas as consumers at branded stations do at the pump.
This term refers to the way in which gasoline is sold to independent operators. They buy what is known as “spot gasoline,” gas which has been sold from refineries to fuel companies and dealers so that they can blend it and sell it on to other operators. Typically, spot gasoline is first sold to branded operations, and then independent operators purchase the excess at a discount. The amount of this discount varies, with independent operators paying what are known as “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 surplus gas production on the part of refineries. Rack inversions can also be caused by rising crude oil prices, which can cause rack prices to fluctuate wildly, not just from day to day, but even several times over the course of a single day. This can be a nightmare for independent operators, who in turn would be obliged to raise their own prices over the course of the day to compensate for the price difference.
When a rack inversion occurs, branded gasoline prices tend to remain a bit more stable, because they often have a contracted price. While their prices will rise, a steady rate of rise is common, and prices may be less likely to change over the course of the day. As a result, independent operators may start to feel a pinch, as they struggle to cope with the rising rack prices for spot fuels. Consumers may also be won over to branded stations, noting vast price differences, and this can force independent operators out of business, if the rack inversion is prolonged.
To deal with the possibility of rack inversions, it is common for independent stations to supplement their income with attached convenience stores and other amenities, in the hopes of making up for potential lost profits by encouraging visitors to the station to buy other things. In some cases, the station may take a loss on gasoline sales to draw customers in the door, in the hopes that they will purchase convenience store snacks or miscellaneous supplies sold by the station's owner.