Printer Friendly

Gasoline allies.

Noticed anything odd about gas stations lately? It's not just that those men with the stitched-in-script name tags who used to top off the tank then buff the windshield have vanished; or that there are fewer fill'er-upand-get-a-Flintstones-mug promotions. The more subtle--and more ominous--change is the disappearance of brand choices throughout the country. Chances are that there used to be ten or so brands to choose from in your neighborhood; now there could be as few as three. And soon enough, three may seem like a veritable buffet.

Turns out that while we've been busy pumping our own, the oil companies have been quietly engaged in a large-scale, multibillion dollar swap meet. Some of the deals:

* Chevron and Exxon jointly announced late last year that they would swap retail gas stations in the Washington, D.C. area and South Florida. Under the agreement, which is scheduled to be finalized June 30, 1993, Chevron will obtain 59 Exxon properties in Broward, Dade, and Palm Beach Counties, and Exxon will acquire 66 Chevron sites in Maryland, Virginia, and Washington, D.C.

When the deal takes effect, Chevron will become the top marketer in South Florida, up from its previous position of number four. Exxon's presence in South Florida and Chevron's in D.C. will be effectively zero. A few months before that agreement was announced, Exxon declared it would withdraw from Los Angeles, a Chevron and ARCO stronghold.

* In 1988, Mobil received 330 BP stations in mid-Atlantic states and New England in exchange for 244 of its outlets in western and northwestern states.

* ARCO abandoned the entire eastern U.S. in 1985; Sun acquired more than 550 ARCO outlets in the northeast in 1988.

These deals would be no more wornsome than McDonald's swapping a few stores with Wendy's but for the odd relationship between wholesaler and retailer in the gas business. The mark-up on a gallon of gas is in most cases a matter of cents, even half cents, so individual stations have little latitude with their prices and not much hope of undercutting competitors down the street. Thus, Big Oil's home offices essentially set the price you pay at your local station and, as the number of available brands in an area dwindle, the comparties get a firmer grip on that price. If present trends continue, your local gas station will have all the competitive advantages of a public utility-minus the regulation. Unlike a Wendy's-forMcDonald's deal, which would leave lunchers with plenty of options if Big Macs got too dear, drivers are stuck with whatever choices the oil companies offer.

The oil industry's trade association says all this swapping is nothing to worry about. "We don't follow those types of deals," said Joe Lastelic, a spokesman for the American Petroleum Institute, after the Exxon/Chevron swap. So far the government has felt the same way; for technical and not very convincing reasons, the Justice Department has allowed Big Oil's divide and conquer scheme to progress virtually unimpeded. But already one consumer group and a whole lot of gas station dealers are sounding the alarm and trying to stop what looks suspiciously like the beginning of a brand new oil monopoly.

Mobil stations

In the early seventies--before the major companies lost ownership of crude oil installations to the governments of the Mideast and elsewhere--it wasn't odd for a refiner to blanket the United States with outlets. Texaco, for one, used to boast that it marketed in every state in the continental United States. A couple of years after the arrival of OPEC, President Carter began deregulating the oil industry and soon the government subsidies, which had kept the pump price of gas low, were gone. Without those subsidies, the oil companies were left looking for ways to reduce red ink in their retail segment.

The strategy of isolating refiners and retailers in discrete regions makes good business sense. Consolidation, of course, means that refinery-tostation shipping costs are reduced. These deals also provide a short cut to an increased market share, eliminating the zoning and other 1ogistical headaches that would otherwise be posed by building new gas stations. Ask the industry about the swaps and you'll get a perfectly sensible answer. "We can enhance our position in Florida and increase our profitability with this move," said Chevron spokesperson Bonnie Chaikind about her company's swap with Exxon. "We're not a big presence in the mid-Atlantic."

No doubt consolidating is good for the bottom line, but one of the morals of the Standard Oil breakup was that what's good for Big Oil isn't necessarily good for the American consumer. Some aspects of these deals smell rather suspect. It seems, to begin with, less than coincidental that all the major players have picked different sections of the country to do their consolidating. And it's slightly unnerving to learn that Citizen Action, a D.C.-based watchdog group, found in a 1991 study entitled "Destroying Competition and Raising Prices: How Big Oil Has Taken Control of America's Gasoline Markets" that all the oil companies' cost-cutting measures have yet to translate into lower gas prices.

In spite of the sums involved in these deals, the government has done virtually nothing to block them. The Justice Department has never intervened or stopped an oil company swap or divestiture because, in their view, these deals don't violate anti-trust laws. And although the Federal Trade Commission (FTC) keeps abreast of movement among the industry's major players, it has acted thus far only in cases where an oil company's wholesale facilities or refining outfits are included in the deal. When Chevron sought to acquire Gulf in 1984, for example, the FTC opposed the takeover until Chevron agreed to divest interest in a refinery.

FTC attorneys maintain that even in markets with relatively few competitors the enterprise of individual dealers will keep competition alive. "When Shell sells gas to dealers," says FTC attorney Art Nolan, "one is better at servicing people's cars, another guy is on a busier street and lowers the price because of a gas-and-go operation. There is competition."

Nolan would have a point except the rules of the oil game are rigged to give companies the kind of power over retailers and their prices that other business folk can only dream about. Unlike the jewelry industry, for instance, where mark-ups are upwards of 50 percent, even high volume gas dealers don't have the flexibility to dramatically raise or lower prices. They are able, in fact, to shave just fractions of pennies off the gallon, a cut which is unlikely to change the buying behavior of even the most budgetminded drivers.

And dealers with even this modest price flexibility are getting rarer as more and more dealerships are purchased by oil companies. Today, about one-third of all gas sold comes from stations that are owned and operated--as opposed to merely franchised--by oil companies, and more are being bought every year. According to dealer advocates, Chevron has tripled the number of company-ops in its southern California fleet in the past three years.

By law--the Robinson-Patman law, to be specific-an oil company is required to offer all franchised dealers in a particular market the same price. But the pricing laws governing a company's sales to its company-operated stations aren't so clear--which means companies could sell gas through the stations they own at prices that put franchised dealers out of business. Indeed, franchised dealers have long accused the companies of undercutting them, and a number of cases around the country now in court will determine whether this practice is legal.

When the oil company is not the station's owner, chances are good that it has another sort of leverage: It's the station's landlord. Typically, an Exxon dealer leases from Exxon. And virtually every retail dealer is obliged, by contract, to sell only the gas his station is identified with. Exxon dealers, for instance, can only sell Exxon gas.

The oil companies, not surprisingly, have fought hard to keep this one-brand-per-retailer arrangement intact. In 1990, after an uncharacteristically successful lobbying effort by gas retailers, the Virginia legislature passed what was viewed as a landmark bill containing several pro-dealer provisions, including one that would allow retailers limited freedom to sell more than one brand of gas. An "open brand" provision would, of course, give oil companies an incentive to keep prices low because retailers would be allowed to shop around with other major companies and with the now rapidly shrinking field of independent fuel suppliers. The Virginia edict, alas, never went into effect. After the majors threatened lawsuits, Governor Douglas Wilder vetoed the open-brand provision in the bill.

Finally, keeping the many details of this sweet arrangement in place are regulatory realities, particularly environmentally stringent--and expensive--underground storage tank standards that all but prevent new players from entering the petroleum marketing game.


The current marketing landscape has gotten a nifty nip and tuck since the realignments commenced. These days, Texaco no longer brags of being a national marketer: By 1992, the company had pulled out of 28 mainland states. In the mid-eighties ARCO abandoned the East, and now actively markets in just five states: Arizona, California, Nevada, Oregon, and Washington. All the moves have left companies holding a dominant retailing hand in certain regions. According to the Lundberg Survey, an industry publication that monitors market penetration, ARCO is the number one marketer in every state it's in except Arizona. Amoco's hold on Missouri and Kansas and Conoco's commanding presence in Colorado are nearly as tight.

Citizen Action found no evidence that consumers are getting gouged by the refiners' regional shenanigans. Instead, taking a cue from John D. Rockefeller's methods in establishing Standard Oil's monopoly at the turn of the century, the oil companies have been accused of occasionally and briefly selling at artificially low prices in certain markets. Such predatory pricing is designed to low-ball smaller independent companies out of existence in the same way supermarkets have all but eliminated mom-andpops from their industry. When a major supplier leaves the area, it reduces the opportunities for a dealer to switch brands, something that can be used as a bargaining chip in lease negotiations.

Franchised dealers, naturally, are howling. Largely as a result of testimony presented by dealer advocates late last year, the Senate Judiciary committee advised federal courts to start applying stricter scrutiny to the antitrust implications of the oil companies' market migrations.

Should the courts begin to heed the Congrasional directive, certain dealers in California might be the first to benefit. Last year, 55 retailers sued Exxon and Chevron over a proposed swap involving 133 outlets in the state. The plaintiffs in the case have won a temporary injunction preventing the transaction at least until their suit is heard. Though the restraining order was granted on issues relating to station leases, the complaint filed in the case does charge that one reason the swap should be voided is that it will facilitate Big Oil's efforts to divide U.S. markets in violation of federal antitrust statutes. Attorneys representing dealers are preparing a similar suit to stop the Florida/D.C swap on the same grounds. No case involving this type of conspiracy allegation has ever been decided in the oil industry.

The plaintiffs in the California case, which is now in the discovery stage, hope that they'll be able to show at trial that the majors have been going about their business far less independently than they've admitted. But Jim Daskal, counsel for the Service Station Dealers of America, which is supporting the plaintiffs in that litigation, confesses that all his side has to go on now are the market shifts themselves.

"Obviously, we'd like to find a 'smoking gun' that would indicate that all these moves are part of a plan, as opposed to natural market evolution," he said. "Certainly, the opportunity for the oil companies to formulate a plan has been there. But the question is, are we going to be able to find the evidence of such a plan?"

Until someone in government decides the petroleum marketing scene needs closer scrutiny, the inter-company back-scratching will go on. And the ultimate impact of that could be a retailing environment that neither dealers nor their customers will find favorable. If the doomsdayers are right, the days when there was a whisper around town about where to buy the cheapest gallon of gas will soon be behind us. And it's going to get harder and harder to tell whether that extra pinch at the pump is President Clinton's energy tax or Big Oil's profits.
COPYRIGHT 1993 Washington Monthly Company
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:gas station swapping by oil companies
Author:McKenna, David
Publication:Washington Monthly
Date:May 1, 1993
Previous Article:Mock the vote: what's wrong with MTV's hot new political coverage.
Next Article:Class dismissed: universities should start caring about how well - and how much - teachers teach.

Related Articles
Ganging Up Against Goliath.
Running on EMPTY.
RUSSIA - LUKoil Moving Into Turkey.

Terms of use | Privacy policy | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters