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August 18th, 2004 Nick Budnick | News Stories
 

Fuel Facts

THE CRUDE TRUTH ABOUT GAS GOUGING

     
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LAST WEEK, even as the price of a barrel of crude oil hit historic highs on the world market, here in Portland several gas stations lowered the cost of a gallon of regular unleaded.

Confused? We don't blame you. The oil business is incredibly complex, dependent on the political prospects of Latin American leaders, the fortunes of African rebels and the whims of Russian petrol czars.

This week, we aim to take a little bit of the mystery out of how prices are set, who profits and why you can expect to keep feeling the pain at the pump for a long time.

I don't drive. Why should I care about oil and gas prices?

What? You think the No. 14 bus is fueled by the driver's good looks? Bike helmets are carved from birch? Whether you drive or not, oil and gasoline prices affect your life. Spend a week reading the business pages and you'll see the price of oil affects the stock market, unemployment and the overall economy. As a January 2003 Atlantic Monthly article noted, "Every major U.S. recession of the past three decades has been preceded by a rise in the price of oil."

Why are Oregon's gas prices so high?

The main culprit for our high petrol prices is that Oregon has no refineries to change oil into gasoline. We can't get gas from the south because California uses its own special clean-air formula, so we are held hostage to just four refineries in the Puget Sound. As industry analyst George Clemen says, "Since there is a very small number of companies serving the western U.S., and the market is isolated...there is no reason for any of the companies to drop their prices."

Why does the price of the same fuel vary so much in the metro area?

Over the last decade, Big Oil has mastered the art of "zone pricing" (see "Pump Wars," page 25), slicing Portland and other cities into tasty little profit-maximizing pieces. Most stations are owned or affiliated with one of the major oil companies, who charge operators wholesale prices based on the station's location--including the neighborhood's income level and whether any competing stations are around. Critics, including U.S. Sen. Ron Wyden, say this practice has been used to severely curb competition at the dealer level--in part by crushing independents like bugs.

How much are station operators making?

Gas dealers say they once could make a decent living off a single station, but now, with zone pricing squeezing profits, they need two or three. Dealers now report paying 14 to 17 cents less for wholesale than what they charge at the pump. Pay 6 cents a gallon for the credit card's cut, figure in labor, and there's not much left. Convenience stores are where most make their money.

OK, I can't blame my dealer--but how about Oregon's self-serve ban?

Gas dealers estimate that having attendants fill tanks adds seven cents to the cost of a gallon. But it's unclear whether consumers would save much if Oregon's self-serve prohibition were eliminated. Under the zone-pricing regime that turns dealers into corporate serfs, Big Oil could simply charge stations more for wholesale gas--in fact, they'd be stupid not to.

How does the gas get from Puget Sound to our tank?

The precious liquid gurgles south by pipeline to the tank farms of North Portland. There, the gasoline is given a spritzer of additives so it meets federal standards; each brand with its own particular recipe. Tanker trucks pull up, gas up and fan out, fueling stations across Oregon.

How much gas do we use?

On average, Beaver State residents burn through about 3,000 gallons of gas each minute.

Is more expensive gas better gas?

When it comes to making the vast majority of cars run better, filling up with pricey high-octane fuel is as effective as conducting a séance. That's why Bob Furey, a top General Motors fuels scientist, puts only 87 octane in his Chevy Trailblazer; ditto for Michigan-based fuels consultant Joe Colucci and his 2002 Oldsmobile Aurora.

I'm confused. Gasoline is made from crude oil. In recent weeks, crude prices hit record highs while prices at the pump kept dropping.

The explanation is simple: The $2.30 gallons we saw in June reflected pure profiteering by Big Oil.

How can we tell? The California Energy Commission takes snapshots showing the breakdown of a gallon of gas. They show that starting in January, major oil companies nearly quadrupled their profits at refineries, which is where they make their money (see chart, this page). Gas prices peaked in June and have since dropped as crude oil prices went up. That's because Big Oil reined in its profit margins, the California numbers show.

Why did they do that?

Why did they drop prices? For starters, Americans started driving less--TriMet, for example, saw ridership numbers go up more than 8 percent in June. Many suspect politics also has something to do with it: Industry analyst Clemen, for example, feels that Bush supporters have been manipulating the futures market to drive up prices and make money--but now they hope to resuscitate the economy in time to re-elect him. Besides, everyone's made enough money to tide themselves over for the year: According to quarterly earnings reports, four of the "Big Five" oil companies reported record profits.

Gouging sounds illegal--is it?

Today, companies don't need to break the law to gouge consumers, according to Clemen (who, by the way, is a good Republican, not some crazy commie). Rather than collude, companies simply use websites (such as www.opisnet.com) to constantly monitor each others' crude-oil inventory, refinery operating levels, refined-gas stocks and wholesale prices.

The result is like a nuclear standoff: Everybody realizes dropping prices doesn't win you market share because competitors can react instantaneously. The resulting price war would make everyone lose lots of money, with no benefit. On the flip side, sharing information helps Big Oil operate refineries in a manner that jacks up profits to the maximum. Clemen says West Coast refiners do a good job of controlling supply to barely meet demand, which "allows them to keep prices high."

That's all they do, share information?

Oh, no. Over the past 40 years, Big Oil has made a concerted push to eliminate independent competitors and refineries. More recently, since the mid-'90s it has repeatedly restricted supply to artificially boost prices and, therefore, profits (see timeline, page 20). One way is by cutting refinery capacity. This summer, Shell tried to close down a Bakersfield, Calif., refinery it claimed was unprofitable, though subsequent filings showed it to be hugely profitable. (Last week, under investigation by the feds, Shell agreed to keep the refinery open until it could be sold.)

In part, the Big Five--Royal Dutch Shell, ConocoPhillips, BP, ExxonMobil and ChevronTexaco--helped shrink the number of refineries by agreeing to share gasoline when one of them comes up short. San Diego lawyer Tim Cohelan--who has a class-action lawsuit now before the 9th Circuit Court of Appeals--says he has discovered dozens of mutually beneficial cross-cutting supply agreements between the Big Five, creating what looks like "one big oil company." So the gas you buy from Chevron may have actually been refined by Shell.

Where does Iraq come in?

In the long run, hegemony over the Middle East may help ensure the United States a steady flow of relatively cheap oil. But some analysts believe the ongoing fighting and heightened fear of terrorist attack has resulted in a $10-per-barrel "terror premium." It's caused, they say, by jittery commodity traders betting on an imminent disaster of some kind. As Jamie Court of the Foundation for Taxpayer and Consumer Rights puts it, "Commodity traders, they're more nervous than your mom--they worry about everything."

How much of all this is Bush's fault?

It's no secret that Bush and his posse have deep ties to the oil business. Heck, Condoleezza Rice, who sat on the board of Chevron, has a tanker named after her.

Some believe Bush's policies have boosted gasoline prices in subtle ways, including at the government's Strategic Petroleum Reserve, a huge complex of salt caverns underneath Texas and Louisiana. In November 2001, Bush directed SPR officials to fill the reserve without regard to cost. In doing so, he overruled SPR officials' concerns that the new policy could result in "explosive price swings," according to documents unearthed in a U.S. Senate investigation. Phil Verleger, an energy economist who studied the subject for the Senate, says the policy has added roughly 30 cents to the cost of a gallon of gas: "It's as if they are conspiring with OPEC to raise prices," he told WW.

Dave Fitzpatrick contributed to this article.

PUMP WARS

A Portland gas station owner fought Big Oil--and you lost.

Seven years ago, Bob Barman, a hard-working Reagan Republican who ran seven gas stations in greater Portland, was poised to demolish the competition--and save us all some money.

Barman, obsessed with beating other station's prices, had entered into a pact with Unocal that would make him Portland's king of low-priced gasoline.

"We have a done deal," company executives assured him on Dec. 9, 1996, at a hotel near Portland International Airport. But Unocal's Oregon stations had just been bought by Tosco, and, according to court documents, outside the room a Tosco exec had another take on the deal with Barman:

"Over my fucking dead body." Thus began one Lake Oswego man's stubborn, seven-year clash with the oil industry. Ask Oregon Sen. Ron Wyden why he's spent the last five years fighting Big Oil, and he cites Barman as Exhibit A.

"To me," Wyden told WW, "the Barman case is a prime example of the way oil companies are willing to stick it to the consumers and small businessmen of Oregon."

With soft brown eyes, a shock of white hair, and an "oh, gosh" quality about him, Bob Barman, 47, looks a lot like Steve Martin. But in a recent interview he wasn't laughing, nor saying much at all. Citing a legal settlement, he'd answer only basic questions about his business.

Friends, family and court records, however, filled in the gaps.

In August 1986, commuters driving by the old 76 station on Southwest Canyon Road noticed something going on: The price sign was bigger, the number next to the dollar sign was 10 cents smaller--and above it, daubed in red paint: "WOW, UNLEADED."

Two years after moving to Portland from Southern California, Bob and Katy Barman had gone into business for themselves using $60,000 they borrowed, begged and scrounged.

Katy had worked for Nordstrom. Bob had spent seven years at Unocal, the 76 brand, overseeing company-owned gas stations where he won awards in sales every year.

Gas stations fall into three different categories. The first is owned and operated by an oil company, a "company store" staffed with hourly employees.

Another type, the independent, is where a station owner cuts a deal with an oil company or middleman to deliver supply.

The final option is a lease from an oil company: essentially a franchise. A lease holder might have, say, a $1,000-a-month lease and pay whatever his supplier wants to charge for wholesale gas--keeping the income left over after wages.

That was what the Barmans did, and they made it work. Their secret? Sell gas on the cheap. At each station, Bob made a point of undercutting the competition's prices. This made the customers roll in. The couple made less profit per gallon--but sold more gallons. They also cut costs; working 15-hour days didn't hurt.

Living frugally, they paid off their loans and took over more stations. By 1991 they had five--as well as a $700,000 home in Lake Oswego. At each new station, chopping prices boosted business, typically by 50 percent. Bob haggled better deals on supplies. He jammed in profitable candy booths or full-fledged convenience stores. Their annual profits hit $500,000, not despite low prices, but because of them.

"Bob was always very aggressive in the marketplace--which was good for the consumer," says Barry Desbiens, who ran a station on Northeast Glisan Street, a mile away from one Barman operation.

By 1996 the Barmans were up to 13 stations, including several 76s in Sacramento and three Chevrons outside Portland. They netted $750,000 a year, promising a bright future for their 2-year-old twins.

But as the Barmans' little empire grew, the business had changed.

In the late '80s, Unocal and the other major oil companies instituted "zone pricing" (see "Fuel Facts," page 21). After surveying the local market, the majors charged each station operator the maximum for wholesale gas that the location would bear.

In theory, the lease holders set their own retail prices, but in reality they had little choice in the matter. By pegging the lease holder's wholesale price to the nearest competition's pump price, Big Oil put the squeeze on its own station operators.

The new system, mind you, did not mean less profit was being made on a gallon of gasoline--it merely changed who was profiting.

Independent dealers also felt the pinch. They, too were subject to zone pricing. Even if you owned your own station, a 10-year binding contract kept you monogamous no matter what your supplier charged. And changing brands between contracts bore a hefty price tag: $150,000 or more to refit the station.

Station operators, including independents, have left the business in droves, leaving consumers fewer choices for their dollar. Since 1990, even as Oregon's population grew by 800,000 (or 29 percent), the number of stations has dropped by more than 600 (26 percent).

One who left was Desbiens, Barman's competitor on Glisan, who says being a slave to his supplier was maddening. Now a homebuilder, Desbiens says it's as if whenever the development biz was booming, his lumber dealer jacked up the price of two-by-sixes--and he was unable to switch to a competitor.

"You were totally at the mercy of the oil companies," says Desbiens. "It just got worse and worse."

Barman, too, watched his profits shrink with his independence--but he saw a way out: becoming a "jobber."

Jobbers are the middlemen granted the legal right to pull trucks up to refineries and pipelines to fill up with America's lifeblood at the cheap, wholesale rate.

A robust, feisty bunch, they used to supply any station, anywhere, but are now relegated to rural areas. Major oil companies have driven them out of cities, where there are few independent competitors and where business is best--thus creating a captive market where profits are jacked.

Andy Aubertine, until recently the state Department of Justice's top lawyer on oil issues, explains it this way: "When you see the jobbers leave, and you see the reduction of the influence of the independents, that's where you're going to see higher prices."

That's why major oil companies would normally never let a city dealer like Barman get jobber rights. Unocal, however, had decided to focus on California, letting its stations here deteriorate.

That was Barman's opening: If Unocal wouldn't maintain his leased stations, he proposed, why not let him buy them? Better yet, make him a jobber--he'd keep 76 going in Oregon all by himself. With 13 stations, Barman had a good bargaining position. He gave Unocal a September deadline--and the company said yes.

Soon, unlike the vast majority of dealers, Barman would be standing toe to toe with the big brands. No longer would he be a serf to zone pricing. Purchasing at wholesale would make him master of his own destiny--and a thorn in the side of Big Oil in Oregon.

"If Bob was buying as a jobber, then the company-owned stations would be in trouble," Desbiens told WW. "Bob could kick their butts--and the oil companies would have a major problem."

One of those companies was Tosco, which, as fate would have it, bought a chunk of Unocal in November 1996. The Connecticut-based refiner had previously supplied independents but now wanted dealers of its own. As part of the deal, Tosco had to honor all of Unocal's contracts, so Barman wasn't worried--at first.

Months later, in March, the company informed Barman that it did not consider the deal a contract--he would never become a jobber.

Under federal gasoline-industry law, even verbal agreements are contracts. So Barman filed a breach-of-contract lawsuit, expecting a relatively painless victory.

Barman's foe, Unocal, hired San Francisco-based Brobeck, Phleger & Harrison--sort of the Death Star of corporate law firms--to swat the pest in Lake Oswego.

Barman, for his part, hired a guy who is on the short list of the very best lawyers in town: David Markowitz of Markowitz Herbold, a boutique law firm that represents Shaquille O'Neal, among others.

The painless victory envisioned by Barman became a brutally contested nightmare. The company's case rested on painting him a liar. His friends say he became obsessed with winning. He spent 60 to 70 hours a week organizing and poring over documents subpoenaed by Markowitz and his partner Matt Levin. His kids were not happy, says longtime friend Margaret Zuercher.

Barman started shelling out for a shrink--as well as more than $40,000 a month in legal bills, according to his brother, Tom Barman.

The trial, when it finally started, went well. On the witness stand, Tosco executives conceded they did not want a jobber in Portland because it would foul up zone pricing by injecting competition. Of course, they phrased it more tactfully: Having that "class of trade" would disrupt the Portland market and be "suboptimal," according to Tosco exec Bob Lavinia.

In the end, the judge agreed with Barman, and a jury awarded him $7.1 million.

It sounds like a lot, but Barman's brother, Tom, says that after you took out his legal fees, the remainder was small compensation for a case that had swallowed his life, crippled his business and tugged at his sanity.

Unocal appealed the ruling, and the Court of Appeals ruled that the case needed to be retried.

As the litigation dragged on, Barman saw his opponent get progressively larger. Amid a dizzying industrywide spate of mergers, Tosco, which had bought part of Unocal, was bought by Phillips 66--which then merged with Conoco to become ConocoPhillips.

Still, the second trial went better: One dealer testified that in December, even as Tosco-Unocal assured Barman they had a deal, Tosco executive Pete Riley had told other 76 dealers, "Over my fucking dead body will Barman get a jobbership in the Portland area."

The jury found in Barman's favor. But before they could put a price tag on it, Unocal offered him a settlement.

By now, public filings show, Barman had mortgaged several gas stations and his family home. His friends say he did not know whether he could pay his next legal bill.

He agreed to settle.

He will not disclose the sum, but according to a court transcript he was paid $8 million and agreed not to badmouth the company. According to Tom Barman, nearly $3 million went to legal bills.

Tim Hamilton, an Olympia consultant and former gas dealer, says, "It's a victory of sorts for Bob Barman, but not for consumers or even other gas dealers." He says if Barman had become a jobber, his lower prices would have had a ripple effect, saving Portland consumers millions.

"What's remarkable is that he had the persistence and the resources to pursue them until he finally got the sleazeballs to court," Hamilton says. "But it doesn't change anything at the pump."

Sen. Wyden sees Barman's struggle as proof that something needs to change at the Federal Trade Commission--which is supposed to protect consumers and battle anti-competitive practices.

"The Barman case confirmed what I'd been saying for years," he says. "There was sworn testimony by oil company executives that they were engaged in redlining in Oregon--where they squeeze the independent guys out of certain areas to limit competition."

HISTORY: IT'S A GAS!

1850s Sperm whales are dying out to provide oil for the world's lamps. Someone notices flammable "rock oil" oozing from the ground. The first well is drilled in Pennsylvania.

1895 The first gasoline-powered car is built. Within a decade, "gas stations" appear.

1907-11 President Teddy Roosevelt goes after John D. Rockefeller's monopoly, Standard Oil, using antitrust law to break it into 34 pieces. Some later turn into Chevron, Exxon, Mobil and ARCO.

1918 Germany, short of oil, surrenders. The United States and Europe divvy up the Middle East.

1944-5 Oil supplies are again crucial to defeating Germany, as well as Japan.

1960 The Organization of the Petroleum Exporting Countries, or OPEC, is formed.

1960s Big Oil takes aim at independent refineries and gas stations, using price discrimination and pipeline control to deny them supply.

1973 OPEC cuts supply and jacks up oil prices. Oil companies make huge profits. Independents are decimated.

1982 An internal ARCO document initiates a plan to wipe out independent stations and their suppliers to establish "market control," allowing large profits.

1990s A series of federal investigations shows major oil companies are artificially reducing refinery capacity and even exporting oil to other countries to create domestic shortages, thus inflating prices and profits.

1991 President George Bush says oil is not behind his invasion of Iraq. His National Security Directive initiating hostilities, subsequently declassified, begins by declaring, "Access to Persian Gulf oil and the security of key friendly states in the area are vital to U.S. national security."

1997 Jeb Bush, Dick Cheney and Donald Rumsfeld form a think tank that calls for protecting American economic interests, including the removal of Saddam Hussein.

Late '90s ARCO has captured the West Coast market. A study says when ARCO pushed out independents, a rapid four-to-six-cent price hike ensued. BP buys ARCO, raising prices more.

2001 The White House commissions an energy study that calls for removing Saddam Hussein, saying he is destabilizing the "flow of oil to international markets."

2003-4 The U.S. invades Iraq. Meanwhile, some analysts say global oil production will peak in a matter of years, not decades. Crude prices top $40 per barrel, long considered the level at which alternative energy research makes economic sense.


GAS PRICES: Near and Far

(One U.S. gallon, 2004)United Kingdom - $5.70France - $5.05Ireland - $4.59Canada - $2.39Honolulu - $2.26San Francisco - $2.19Seattle - $1.95Portland - $1.90Denver - $1.84Charlotte - $1.78St. Louis - $1.72Shanghai - $1.47Caracas - $0.14Sources: Domestic prices as of August from AAA. International prices as of May, from AirInc.

OIL: Not Just for Cars Anymore

Feeling smug about your independence from oil, just because you don't drive? Sorry. Petroleum makes its way into a lot of things besides gas tanks.

albums - antihistamines - artificial limbs - balloons - Band-Aids - bike helmets - candles - carpets - computers - contact lenses - crayons - credit cards - deodorant - denture adhesive - dishwashing liquids - disposable diapers - fertilizers - garden hoses - Gore-Tex - guitar strings - hand lotion - insect repellent - insecticides - life jackets - milk jugs - panty hose - pens - perfume - safety glass - shampoo - shower curtains - skis - sunglasses - telephones - tents - tires - toilet seats - toothbrushes - trash bags - umbrellas - VCR tapes - vitamin capsules.

CHEAP GAS Is a Click Away

To beat the burn at the pump, check out www.portlandgasprices.com before you fill up. This site allows motorists to post daily updates on what's out there. As of Friday, here was the cheapest gas they found:

$1.74 per gallon: Safeway, 20151 SE 212th Ave., BoringFred Meyer, 15995 SE Walker Road, BeavertonFred Meyer, 2200 Baseline St., Cornelius

$1.75 per gallon:76, 20265 SE Highway 212, Damascus Arco, 2888 Baseline St., Cornelius

 
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