Facts About Proposed Gasoline Marketing Regulations

• U.S. Department of Energy
• Federal Trade Commission
• California Chamber of Commerce
• California Independent Oil Marketers Association
• American Legislative Exchange Council
• Local Chapters of the Teamsters Union
• Western States Petroleum Association
• San Francisco Committee on Jobs
• San Diego County Taxpayers Association
• San Francisco Chamber of Commerce

• Company-operated service stations often offer the lowest retail prices.  By eliminating company-operated outlets, divorcement laws would eliminate the lowest priced gasoline, thus harming consumers.
• Changing who operates gas stations won’t make any difference in the competitive mix – at best there would still be the same number of stations, and at worst some stations could close.  This would leave even less competition than before, and, likely, higher prices.  Again, consumers and businesses would lose.
• If major refiners were forced to stop operating their own gas stations, a significant source of job creation would be lost.  Employees of company-operated gas stations typically enjoy good paychecks, as well as health insurance and other benefits for they and their families, which are seldom offered at non-company operated outlets.  Company operated stations also offer key entry level positions and training programs for workers who do not possess the skills or education to access career opportunities elsewhere.
• Divorcement has failed virtually everywhere it’s been tried.  Nevada’s 16-year old divorcement law was recently amended to let major refiners start operating their own stations again.  In Maryland, the Department of Fiscal Services found that gas prices went up as a result of divorcement.

• "[Divorcement] hasn't worked in three or four states where it has been tried.”  (1)
•  “Divorcement is an unwarranted intrusion into the market.  The allegations of proponents of divorcement do not support its enactment.” (2)
•  “Maryland consumers may be paying millions of dollars more per year for gasoline primarily because of [the divorcement] law.” (3)
• Economic research has demonstrated that retail gasoline prices increase when states enact laws prohibiting or limiting refiners’ ability to own retail outlets that compete with the retail outlets of their branded dealers.” (3)
• “The Department of Fiscal Services believes that divorcement has resulted in higher gasoline prices for consumers.” (4)
• “The Department believes that divorcement led to both higher gasoline prices and shorter hours of operation in the period following divorcement.”  (4)
• “Published economic research demonstrates that…divorcement laws tend to increase retail gasoline prices.” (3)

     (1) San Diego Union Tribune 2/10/00
     (2) Department of Energy
     (3) Federal Trade Commission
     (4) Maryland Department of Fiscal Services

 “Open supply” legislation, as it has been proposed in California, would eliminate voluntary exclusive purchasing agreements between refiners and dealers.  Proponents claim that by freeing dealers to purchase their gasoline from any supplier offering the dealer’s particular brand, dealers would be able to shop for the lowest price and pass those savings along to their customers.  But economists and others agree that open supply would not work, and in fact would be likely to cause supply disruptions and higher retail prices.

Impacts of open supply:

• The existing system of voluntary contracts allows refiners to accurately project how much gas they will need at any given terminal on any given date, and assures dealers that they will have enough gas each day to serve their customers.  By doing away with the contract system, it is likely that on any given day, the lowest priced terminals would run out of gas first, with many dealers disappointed when supplies are not adequate to meet their needs.  Those remaining dealers would then have to scramble for supplies to other terminals where the price might be higher or where inventory might be insufficient to meet the needs of all the dealers and jobbers shopping at that particular terminal.  If extraordinary demand is placed on a terminal because of low price, the laws of supply and demand dictate that the price must increase to balance the increased demand.  The effect on prices may be just the opposite of what is intended.
• In short, terminals will never know how much gas they can sell, and dealers will not know from day to day where their gas will be coming from, nor how much it will cost. The result: to avoid running out of gas, terminal reserves would likely be increased.  This would effectively reduce available supplies, driving prices upward.
• Open supply laws would do nothing to increase the supply of gasoline in California – they would only create market uncertainty, which would cause terminals to increase reserves, effectively reducing available supplies.  This would logically result in higher pump prices.
• Even if some dealers realized savings at the wholesale level, there is no guarantee that any of these benefits would be passed on to consumers.  Any profits from open supply legislation are likely to be enjoyed only by that handful of dealers who sporadically are able to locate and buy their supplies at a lower price now and then.

Major findings on open supply:

• The Department of Energy opposes divorcement and open supply as “contrary to national energy policy.” (1)
• “Open supply undermines the direct distribution network, leading to costly inefficiencies...and higher costs to consumers.”  (1)
• “Open supply is not in the best interests of a competitive marketplace.  The undermining of the direct distribution network would hurt the very dealers that open supply was meant to protect. The inefficiencies introduced into the market would adversely affect competition and consumers.”  (1)
• “[Branded open supply laws] may be harmful not only to consumers, but also to retailers that favor such laws.”  (2)

     (1) U.S. Department of Energy
     (2) U.S. Federal Trade Commission

“Uniform wholesale pricing” regulations, sometimes referred to as “zone pricing” regulations, would require refiners to equalize their wholesale prices at each terminal regardless of market conditions.  Proponents of uniform wholesale pricing contend that this would level the competitive playing field for dealers by eliminating regional differences in wholesale prices.  In reality, this legislation would be likely to raise, not lower, wholesale prices – and thus retail prices – across the board.

Impacts of uniform wholesale pricing:

• Uniform wholesale pricing would deprive refiners and dealers alike of the ability to respond to local market conditions, rendering them less able to compete in certain regions.
• Uniform wholesale pricing would eliminate the time-honored business practices of volume rebates and allowances, long-term purchasing rates and other pricing arrangements customarily used by most industries in setting up voluntary buy-sell contracts.
• Rather than reduce wholesale prices across the board to the lowest level offered in the most competitive markets, economists believe that refiners would be likely to raise prices to uniformly higher levels in order to avoid financial losses throughout the distribution system.  This would logically translate to higher pump prices.
• Uniform wholesale pricing would do nothing to increase the supply of gasoline in California.

Major findings on uniform wholesale pricing:

• “Our present conclusion is that the effect of….uniform wholesale pricing and retail divorcement lead to….anticompetitive impacts upon competition and consumers.”  (1)
• “Rationalizations for retail divorcement, as well as for similar and complementary policies [such as open supply and uniform wholesale pricing] do not withstand scrutiny.” (2)
• “Legislative actions which would constrain differences in prices appear (for example, restriction of temporary competitive allowances to some gasoline stations dealers) appear unnecessary.” (2)
• “Where there is no danger that a monopoly might later be created, consumers are harmed by public policies that have the effect of increasing low prices that are the product of the competitive process.” (3)

     (1) U.S. Department of Energy
     (2) American Legislative Exchange Council
     (3) Federal Trade Commission

|| Top of Page ||