Gas Pains

Gasoline is one of those essential things we take for granted.  A hydrocarbon product, it starts as crude oil, thick and gooey like that molasses in your kitchen cupboard.  To make gasoline, oil companies boil crude at high temperatures and pressures to refine it, called cracking, into things that we can use. Depending on how long you boil it, at what pressure and where in the process you drain off the liquids, you get diesel, or gasoline, or kerosene, or Jet A, or paint thinner, or naphtha.

Curiously, the final retail price of gas, taxes included, jiggles around like a siliconed stripper on the brass pole.  Through some amazing coincidence, when the Esso down the street raises the price to 69.9 a liter, everyone else, Sunoco, Shell, Petro Can and off-brands all manage to get their prices right in line in a matter of minutes. 

If one station drops their price, say to 61.9, the others all follow suit plus or minus a tenth of a cent, again in mere minutes, the argument being “market forces” and is probably a truthful statement. 

Except the price the station paid for the gas, in the tank in the ground, hasn’t changed one bit.  Gas stations are independent businesses who buy their gasoline from a distributor at set prices that change hourly.  The gas station operator, who buys his or her gas in 500 to 1000 liter loads, pays a fixed price when the tanker rolls up on Wednesday. 

If the price drops on Thursday afternoon, the operator has 400 liters of gas in the ground that they paid a higher price for than they can sell it for.  The gas station operator gets screwed.  If the price goes up from what they paid for their load, then the operator gets a few extra cents a liter.  Considering that the mark-up on a liter of gas is about 2 cents a liter for the gas station itself, wobbly prices can gut the profits for a small business over the course of an hour. 

Oddly, the gas companies and the governments aren’t affected by this price flutter.  The gas company and the refiner, all get theirs before it goes into your car.  The government gets theirs regardless of the final price.  The only ones who get squeezed are you and me, who pay the final price and the gas station operator who has 2 cents a liter mark-up to play with to remain competitive with the Esso, or Shell, or Petro Can down the street. 

The gasoline marketing companies try not to own gasoline retail stations.  They do try to support their dealers as best as they can, but the argument is always “these are independent business people who can set whatever price they want to remain competitive”  This sounds great in front of a Parliamentary committee investigating price fixing in the oil and gas industry.

The unstated second sentence is:  “And if they don’t do as we say, they’ll lose those Esso/Shell/Sunoco/Petro Can pumps, signage and image so fast, they’ll wonder what the hell happened”

Are there phone calls from head office to regional office to dealers?  Of course there is and if you think otherwise you are an obvious candidate to sit on the committee investigating gasoline prices.

An example will suffice, with just enough information held back to skirt libel laws: A small town south of Ottawa has five gas stations, four major brands and one off-brand.  A phone call comes down to one of the major brand retail stations:  “Drop the price to 59.9 a liter at 2 pm.” 

Another call comes in, to another brand station:  “Match their price at 2 pm.” The off-brand station gets a call and they’ll match the price, less 2/10th of a cent, as is their usual practice.   But two of the stations don’t get the call.  They’re still selling at 64.9 cents a liter when 2 pm rolls around. 

One of the retailers calls his regional office and asks for price support to match prices.  The answer from the phone is the telling one:  “Don’t you dare match prices, or we’ll pull your franchise.  It’s Brand X’s weekend.”

There is just enough buffering from head office to protect the big guys.  The regional office is a third-party independent distributor, who also, can set the wholesale price at whatever price they want to remain competitive.  The gas company just sells them gasoline at the distributor price.  Oh and they act as the agent of the refiner.

Then, the independent distributor wholesales the specific brand of gasoline only to specific brand retailers at whatever price they can get.  So far, two layers of “independent” businesses set their prices based on “market forces”

When you see prices jump or drop 10 cents a liter, someone in the chain is either making, or losing a lot of money.  Rest assured it is not the gasoline marketing or refining company, or the government or the distributors.  You tell me.