Does Costco Really Have the Lowest Gas Prices?

Here's how cheap Costco's gas really is and how it keeps it that way.

If you're a Costco member, you might have noticed the gas sold at its stations is much cheaper than the surrounding stations. But how much cheaper is Costco than the average gas station? Is it really the cheapest gas around? Here's a rundown of how cheap Costco's gas really is, how it keeps it that way, and what consumers should keep in mind.

Does Costco really have the lowest gas prices?

The short answer is that Costco usually has gas prices significantly cheaper than other nearby gas stations, with the possible exception of other warehouse clubs like Sam's Club. But the answer to how much cheaper it is depends on the area, and when the data is taken.

According to a GasBuddy analyst, warehouse club gas prices are typically $0.05 to $0.25 lower per gallon, compared to standard gas stations. Other reports have said Costco can be as much as $0.30 per gallon less.

How does Costco keep its gas so cheap?

First, Costco's gas isn't cheap because it's poor quality. In fact, the exact opposite is true, as Costco's Kirkland Signature Gasoline meets top quality standards. So why is it so much cheaper than the competition?

The short answer is that unlike pretty much every other retail business that sells gasoline, Costco doesn't care about making money from its gas pumps. In fact, Costco typically sells its gas at a moderate loss.

Why would Costco do this? It's not an act of charity. Just like the $1.50 hot dog meals that often make headlines, Costco is willing to take a loss on its gas to get you into the store more often. The idea is that when you need to fill up, Costco's gas is so much cheaper that it's worth driving out of your way to get. Once you're there, hopefully you'll park and come into the store where you'll find all kinds of things you "need," which Costco will make money on.

There's another reason Costco gas is so cheap. Costco makes it well-known it has the cheapest gas, even to non-members. Its gas stations are usually on the most visible part of its property. Simply put, you have to be a member in order to buy gas at Costco, and its gas stations are a daily reminder of that to traffic. Costco makes the bulk of its profits on membership fees -- not on markups inside its stores.

Is a Costco membership worth it just for the gas?

This last point begs the question: "I don't shop at Costco, but should I get a membership just for the cheap gas?"

This can certainly be the case. Let's say that you drive 12,000 miles per year and your car averages 30 miles per gallon. So, you'll use about 400 gallons of gas in the typical year. If Costco gas is $0.30 cheaper than your neighboring station, this translates to $120 in savings per year for your personal finances. Meanwhile, the basic Costco membership costs half this much.

There are a few downsides to keep in mind. Since it's so cheap, Costco's gas lines can get long. And it's also important to note that Costco only takes debit cards, Costco cash cards, or Visa credit cards. The first time I went to Costco, I did so with my American Express card and my usual backup (a Mastercard) and found this out the hard way. (Note: If you get the Costco Anywhere Visa® Card by Citi, it offers 4% back on gas purchases of up to $7,000 per year.)

The bottom line is yes, Costco typically has the lowest gas prices. In fact, they're so low that it can be worth getting a membership for this benefit alone.