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Texas Retailers Rage Against Big Oil

Something seemed awry when a number of independent fuel operators along a stretch of this congested Texas city spotted identical branded locations retailing gasoline at 10 to 12 cents a gallon below their stations.

Of prime concern was that the lower-priced stations were all owned by the major oil companies, the same companies that sell to these disgruntled operators. "What can you say when you see a guy carrying the same flag as you retailing at 89.9 cents a gallon and you're buying from the rack at 90 or 91 cents? There's no way to compete," said Roe Traugott, who operates Texaco-branded Tyco Oil Co., a three-store operation in San Antonio. "I think it's an attempt to eliminate the marketer, the distributor, the middleman. It's really a mess in the major cities here."

The practice is called "price inversion." That's when gasoline distributors and dealers pay more on the wholesale end than oil-owned stations charge motorists on the street. The practice, which can result in a double-digit differential among same-branded stations, stirred a Texas gasoline retail group to accuse several major oil companies of anticompetitive behavior and has contributed to a federal agency's probe into pricing practices.

"Inversions used to be a regional issue, a state or two," said Dan Gilligan, president of the Petroleum Marketers Association of America (PMAA). "But we've had inversion problems across the country over the past 12 to 18 months. We saw it in the Mid-Atlantic region earlier. The biggest battles we're fighting now are inversions and below-cost pricing. If a major decides to do battle with the mega groceries and mass merchandisers, the independent retailer is going to be squeezed in the process."

In November, John Phillips, president of the Texas Petroleum Marketers and Convenience Store Association (TPCA), fired off letters to heads of at least a half-dozen major oil companies and refiners — including ExxonMobil, Chevron, Texaco, Shell, Ultramar Diamond Shamrock (UDS) and Phillips — that do business in the Lone Star State. In it, he cautioned, "the predatory and anti-competitive conduct of your company leaves us no other choice but to solicit your assistance before more formal legal measures are initiated."

To remain competitive, dealers and jobbers are forced to absorb losses on retail prices. Even those garnering a nickel margin are losing when related costs such as salaries and equipment maintenance are factored in. "Our hope is that they will realize that 65 to 70 percent of their [retail] business in Texas is at stake. And if the price inversions continue, we won't be a viable entity," said Lynton Allred, TPCA's executive vice president.

With the exception of San Antonio-based UDS, which owns and operates most of its Texas stations, the major oil companies rely on dealers, jobbers and convenience store operators to sell the bulk of their gasoline product.

Toward that end, oil companies defiantly deny any wrongdoing and say they are not out to sabotage a critical component of their retail distribution system. "There are times when prices are inverted and there are times when the dealer tank wagon can be lower and the company-operated locations are higher priced," said Exxon Mobil Corp. spokeswoman Jeanne Miller.

"But during times of inversion we do provide support to stations that compete with 'petropreneurs,'" she added, using the latest buzzword to describe high-volume petroleum retailers like Costco, Wal-Mart and Albertson's.

Both Miller and Allred confirmed that ExxonMobil did respond to the TPCA letter, but both declined to release those responses, saying it represented a private correspondence.

Retailer Relief?

According to oil analysts, most major oil companies offer some relief to dealers and distributors during price inversions, a point that ExxonMobil readily acknowledged. "ExxonMobil believes it treats distributors fairly and that includes appropriate assistance in inversion situations," said another company spokeswoman, Betsy Eaton. Asked specifically about the contents of the assistance package, she said, "that is something that is considered on an individual basis — individual locations, individual distributors. It's not something you can generalize."

TPCA's Allred noted that some oil companies provide as much as a 7-cent-per-gallon temporary price allowance that comes by way of refund or credit, but that the amount does not cover the true loss to the retailer. "We're looking at instances where hypermarkets price at $1 or less, and in the major metro markets like Houston, Austin and San Antonio, you have Exxon and UDS leading the price wars.

"Because of what our members have to pay at the wholesale rack, we can't compete with that, even with the allowances," Allred added. "It's putting our businesses at risk."
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