Wednesday, April 20, 2005
POLK COUNTY -- News flash: gas prices are soaring. Unless you don't own a car, a radio, or a TV set, you have probably figured this out for yourself.
What you may not be able to figure out is why gas prices rise more in some areas. Take Dallas for example. Pump prices are, on average, 20 cents more per gallon than in Salem. Why? It's called zone pricing.
Distribution companies often charge local gas station franchise owners different wholesale prices for the same fuel.
Theoretically, the wholesale price is based the station's location and activity level, as well as the average income level of the surrounding neighborhood and the number of competing stations in its immediate vicinity.
"It really frustrating on our end when people look a the prices and think I'm gouging, when really I'm just trying to keep things as level as possible," local Exxon station manager Stuart Wright said.
Critics of zone pricing, including U.S. Sen. Ron Wyden, say the practice has been used to severely curb competition at the station level.
"I have spent years documenting unethical and anticompetitive practices in this country's gasoline markets -- practices that have driven prices up and cost consumers far too much," Wyden said on his web site in September of 2003.
Wyden also said gasoline distributors participate in an activity called "redlining," where the gas companies try to keep independent wholesalers from competing in tight markets by refusing to let station owners buy cheaper gas elsewhere.
Assuming there are other wholesalers, that is. Oregon has a shortage of independent dealers. And with no refineries to make crude oil into gasoline, Oregon has to get its fuel from four refineries in the Puget Sound area.
Shipping it here also adds to local gas prices. We don't buy gas from California because that state uses a special formula because of air pollution problems.
Back to zone pricing: This form of price setting was originally designed in the 1970s around the time the government lifted price controls from gasoline. The thought was to keep remote service stations in lightly traveled areas from losing money by selling gas to them at a lower rate.
By allowing this practice, lawmakers enable a market environment where large oil companies, like Exxon and Shell, can charge different prices for the same gas at their branded stations. They can also charge independent stations more for wholesale gas than they do their own stations.
It creates a very gray ethical area. The gas companies argue that price zoning allows them to keep stations open in less profitable areas by making up their profit deficits in more populated areas.
But that fails to explain what is going on in Polk County. Dallas is a smaller, poorer community than Salem. It is more remote than Salem. So why are the prices significantly higher here?
Few people in the industry are willing to try to explain it.
It may just be the captive location. Most people won't drive half an hour out of their way to get a tank of gas. Until prices rise above $3, people will still choose the convenience of buying gas near home.
Industry analysts say that prices should drop soon. Crude oil prices cost less than they did a week ago.
Most station owners, like Wright, are just sitting on their heels, hoping the wholesalers will offer them and their customers some relief soon.
More information: The department of energy has a web site about gas prices at www.eia.doe.gov. Sen. Wyden's site is wyden.senate.gov.