Maryland Mobil station owners say they are squeezed by parent

The system that prohibits franchisees from shopping around for better deals has been in place for decades in the industry…"The oil companies are too powerful," Fiore said. "It's an issue of big business versus small business, and small business tends to lose."

The Business Gazette
December 3, 2004

Maryland Mobil station owners say they are squeezed by parent
Kevin J. Shay

The free market for some owners of Maryland's Mobil service stations is not all that free, they say.

Increasing industry consolidation and a virtual monopoly among big oil companies are squeezing smaller gas stations, which cannot shop around for better prices from suppliers under their trademark franchise agreements, the station owners say.

In addition, the stations' parent franchising company, Sunoco of Philadelphia, which acquired the stations after several sales following the 1999 merger of Exxon and Mobil, has raised rents substantially, they say.

The situation has prompted Ron Harrell, owner of Cloppers Mill Mobil in Germantown for 10 years, to trim his workforce and cut other costs in the past two years, even as gas prices have skyrocketed.

"I'm down to 15 employees now from 18 to 19 two years ago," said Harrell, who also owns some stations in Virginia. "My employees are working longer hours. And I'm having to expand service hours to make up for some of the lost profit margin."

Local Mobil franchisee stations such as Harrell's can buy gasoline only from Sunoco under the franchise agreement. In signing an agreement last year, Harrell said he was able to purchase the Cloppers Mill station outright but had to sign a 12-year supply agreement with Sunoco as a condition for the sale. That means Harrell is locked into purchasing gasoline only from Sunoco until 2015, when he would be free to shop around.

Meanwhile, other dealers, such as Free State and Sheetz, have more flexibility to shop around for the best deal from suppliers and offer cheaper gas prices since they are not as directly connected with the big oil companies.

"We have no option to shop for products that would be cheaper," Harrell said. "It's really a consolidation issue. If we had a level playing field, you would see a better price for consumers."

Harrell, whose station has a profit margin of between 8 to 10 cents per gallon, has seen gas prices increase about 30 cents a gallon in the past year. Prices across the country rose an average of 8.6 percent in October alone, according to the U.S. Labor Department.

"I've seen an erosion of our profit margins," Harrell said. "This is a tough business to be in."

A spokeswoman with Exxon Mobil Corp. of Irving, Texas, said the company owns only Exxon stations in Maryland, not Mobil stations, and could not comment on the situation. Officials with Sunoco, owner of the Maryland Mobil stations, did not return calls for comment.

Dealers with other stations have gone to court over concerns similar to Harrell's.

Some Shell station owners filed a lawsuit in 2001 in federal court in Boston against Royal
Dutch/Shell Group of The Hague, Netherlands. They claimed the parent company essentially drove them out of business in the late 1990s by raising wholesale gas prices and rents, to increase the number of company-owned stations. The case's trial started last month and continued into Thursday, a court clerk said.

Also, in federal court in New York, some service station and food mart owners filed a lawsuit in early November against Shell, ChevronTexaco Corp. of San Ramon, Calif., and Saudi Refining, a Houston unit of Saudi Aramco, alleging the companies conspired to fix the price of fuel sold to about 20,000 locations nationwide.

The system that prohibits franchisees from shopping around for better deals has been in place for decades in the industry, said Paul Fiore, director of government affairs at the Washington, Maryland, Delaware Service Station and Automotive Repair Association in Bowie. But the consolidation of oil companies has exacerbated the franchisees' plight in recent years, he said.

"There have been a lot more instances of rents going up, for example," Fiore said. "The longtime dealers are frustrated. There is not a lot they can do."

Another factor is zone pricing, the practice of oil companies setting specific prices for fuel according to areas, Fiore said.

"Most consumers don't understand why prices are so different a couple of miles away," he said. "If the suppliers charge more, the individual service stations have to charge more or they can't stay in business. … There is not a lot of money in this business."

Other factors affect gasoline's costs and prices, according to the American Petroleum Institute, a Washington, D.C., trade organization representing the oil industry. The institute said in a statement in October that gas prices increased then largely because "bad weather in the Gulf of Mexico and continued instability in some key oil-producing regions have restricted production, boosting crude oil prices."

Hurricane Ivan forced the evacuation of hundreds of oil platforms in the Gulf region and led to a production shortfall of 15 million barrels, the institute said.

Other factors include taxes and states and cities requiring special gasoline formulation to cut air pollution, according to the institute. The 42 cents per gallon in federal and state taxes charged in Maryland in November was 2 cents below the U.S. average in a federal government survey. Maryland ranked tied for 25th with Massachusetts among states, below top-ranked New York at 58 cents and above low-end Alaska's 26.4 cents.

Harrell noted that most big oil companies' profits are substantial, although he said he doesn't blame them for making a profit.

"I don't want to hinder oil companies from doing business," Harrell said. "I'm all for the capitalistic system and making profits. … Still, a level playing field makes sense."

Sunoco reported a $427 million profit for the first nine months of 2004, up 54.7 percent from the same period last year. The company attributed the rise to "significantly higher wholesale fuel margins, higher chemical margins and added income from acquisitions, including the Eagle Point refinery, Speedway and ConocoPhillips retail gasoline sites and the 2003 propylene supply agreement with Equistar Chemicals."

Exxon Mobil saw a $16.9 billion profit in the first nine months of 2004, about 14 percent higher than the same period last year. That followed an 88 percent increase in profits in 2003. Other large oil companies, including Royal Dutch/Shell, BP of London, ChevronTexaco and ConocoPhillips of Houston, reported similar substantial income increases.

Higher crude and gasoline prices this year have boosted company revenues, but oil and gas industry profit margins have been in line with those of other industries, the petroleum institute says. During the second quarter of 2004, the oil industry's profit margins averaged 7.2 percent, lower than 7.6 percent for all U.S. industries, according to the institute.

As for how small stations can competitively bid out gasoline supplies, Fiore and Harrell said it may take a political solution. But they weren't too optimistic about bills passing in Congress, including one filed by a Prince George's County legislator.

"The oil companies are too powerful," Fiore said. "It's an issue of big business versus small business, and small business tends to lose."

A bill filed by U.S. Rep. Albert R. Wynn (D-Dist. 4) of Mitchellville would prohibit a franchiser from transferring its interest in the franchise during the term of the franchise agreement, except in certain circumstances. It would also keep a distributor from fixing fuel prices at retail outlets unless it operated that station.

Another bill filed by Rep. Michael Thompson (D-Calif.) would prohibit companies from selling gasoline to different stations for different prices. Current agreements would be grandfathered.

Both bills were filed almost two years ago and haven't made it out of the House Committee on Energy and Commerce.

Maryland has some good laws to protect owners such as Harrell, Fiore said. One prevents oil companies from operating stations and another prevents stations from selling gas for below cost to drive out competition.

But dealers should also be able to obtain their own credit card processing companies and not have to rely on those chosen by franchisers, said Harrell, who has worked on the political issues for years as a board member and former president of the Virginia Gasoline Marketers Council. That organization works closely with the Maryland association in lobbying politicians and on other efforts.

"We've been modestly successful in making some progress through the years," Harrell said. "But we're up against a big lobby with a lot of clout. It's been an uphill battle."

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Risks: Big Oil, Monopoly, Rising rent, Must buy only through franchisor (tied buying), Mergers and acquisitions, Money swears, David and Goliath story, Must use franchisor's credit card processing company, Opportunism (self-interest with deceit), United States, 20041203 Maryland Mobil

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