The consistently high gasoline prices in the California have been blamed on price “spikes” caused by shortages of fuel due to California refinery outages, crude oil production cuts by the OPEC cartel and California’s special clean-burning fuel. At its core, the gas crisis is all about power and, similar to HMO care crisis of the 1990s and the insurance premium crisis of the 1980s, the fact a highly consolidated industry has developed a grave imbalance of power that can be exploited for pecuniary gain. Reforms being debated this week by California Attorney General Bill Lockyer’s gas pricing task force must address the unchecked power exercised by major oil companies in California — where six refiners control more than ninety percent of the refining capacity and also own the majority of retail gasoline stations.
Gas pricing once relied on competition for the motorist’s business between major oil companies through their “branded” operations, on one side, and “unbranded” independent operations, on the other. Unbranded independents are retailers who buy unbranded gasoline for resale to the public at non-company stations, so they are free to buy from any source, including an importer, that offers the best price on any given day. Tension between “the majors” and the unbranded independents kept the major companies honest on price and supply. The roots of the current price crisis can be traced to the demise of the unbranded independent operations, whose eventual extinction was hatched in a confidential 1982 memo from ARCO’s “Strategic Pricing Unit.” In the top secret memo, only made public after ARCO was subpoenaed and cited with contempt by the Nevada Legislature, top company managers declared the “traditional two-tier, major-independent market system no longer able to co-exist.”
The ARCO executives’ outline foresaw “market control eroding as consumer goes to lowest price mode of delivery (independent stations)” and hatched a plan for one tier “market control” that included taking over the business of unbranded independent operations (eliminating competition ), as well as reducing surplus supply at refineries.
The memo’s date, 1982, is particularly significant because that is when federal price controls of gasoline had just ended. After that, some major oil companies began refusing to supply stations unless they signed an exclusive “branded” contract (where the company could control the price of the gas.) Petroleum industry expert Tim Hamilton, instrumental in making public the ARCO memo, states, “Chevron held the largest refinery capacities in the West and announced it would no longer sell any gasoline to unbranded independents. Following the announcement, the company branded hundreds of existing stations under its trademark.”
Another tactic major companies use in driving out unbranded independent operations is creating artificial “zone pricing,” where gas prices at the branded pump in some areas are 15 cents below the price paid by the unbranded station to the refiner for its fuel. Independent are forced to fly the company flag or go out of business. Zone pricing is why motorists see differences on the pump of up to 20 cents apart at stations of the same brand only a few miles from each other. Hamilton points out that, “by 1998, the unbranded independent sector had declined to the point of near nonexistent in most markets”
Reducing refining capacity (controlling supply) was a critical part of ARCO’s 1982 plan. Since then, smaller independent refineries have shut their doors and the majors have closed additional refining capacity. The number of California refineries has shrunk to half what it once was. The West has had significantly higher prices than the rest of the nation for longer periods of time, and, not surprisingly, West Coast refiners have posted higher profit margins than in the rest of the nation.
Oil companies maintain these profits by an astonishing degree of control from the refineries to the local service station. The companies move refined product through jointly owned pipeline to shared truck loading terminals to branded stations.
This vertical hold can be broken by reforms now being considered by the Attorney General’s task force and legislation drafted by Hamilton and his Automotive Trades Organization of CA. “Divorcement” would prohibit refiners from setting retail gas prices, and has been tried with documented success in Maryland and Nevada. “Fair Wholesale Pricing” would prohibit zone pricing practices that favor company-operated stations and eliminate independent dealers.
Without such reforms, refiners will continue to enjoy what ARCO execs hoped for in 1982, “a lasting period of quite acceptable profitability,” and motorists will continue to pay more than they should.
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Consumer activist Jamie Court is co-author of Making A Killing: HMOs and the Threat To Your Health (Common Courage Press, 1999) and advocacy director for the Santa Monica-based Foundation for Taxpayer and Consumer Rights.
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