ACTIONS AND INACTIONS OF THE DEPARTMENT OF ENERGY CONTRIBUTING TO THE DESTRUC- PRAYER THAT CONGRESS IS INTERESTED IN PRESERVING A COMPETITIVE GASOLINE INDUSTRY AND WILL PROVIDE LEGIS- LATIVE RELIEF .. .61 INTRODUCTION There are several reasons why the authors undertook this report. Congress has been very busy dealing with larger energy problems, while the problems of small business in the gasoline industry have grown worse. The takeover of marketing is in an advancing stage and unless stopped now, the result will be irreparable damage to the structure of competition in the gasoline industry. Additionally, the writers of this report felt that individuals representing different backgrounds could come together in good faith and explain the problems that are eroding competition provided by branded marketers, private brand marketers and which are contrary to the public interest. The writers of the report felt that there was a definite need to view problems confronting small business in this industry in a broad sense so as to fully understand what was happening and what was in store for competition. To carry out the goal of fully understanding the problems that were injuring and destroying competition in small business it was necessary to consider a large volume of information about this complex industry. This broad base understanding is clearly needed if an effective response is to be developed to the problems undermining the structure of competition in the gasoline industry. Thus, Chapter I of the Report presents gasoline marketing as the last stage in a highly integrated petroleum industry. Next, several of the long standing problems which have restricted the normal workings of competition are developed in Chapter II. This chapter also explains that Congress has passed important legislation to preserve competition in this industry, but that this action solved only one set of problems and has not stopped the continuing destruction of competition. Information is presented in Chapter III which shows that several large petroleum companies deliberately set out on a course of action to destroy branded and private brand marketers and that they have succeeded. The unfair and anticompetitive practices employed by these petroleum companies to destroy competition and to integrate forward into direct marketing are developed in Chapter IV. The material presented in Chapter V explains how the actions of the Department of Energy have aided and abetted the destruction of small business and are contributing to the takeover of marketing by the large refiners. A summary of the major factors contributing to the destruction of competition in the gasoline industry is presented in Chapter VII. Clearly the gasoline industry is at a turning point. The petroleum products shortages and regulatory decisions have established an environment in which the large refiners can use the power developed from the earlier stages of the industry to eliminate the strenuous competition provided by small business. Given a chance to fairly compete and not to be obstructed by the powers of the integrated firms derived by their non-marketing activities, the gasoline industry can remain highly competitive. On the other hand, if action is not taken to permanently stop the integrated firms from unfairly becoming involved in marketing, then these large firms will completely dominate the industry by integrating forward from crude oil production to the final sales of gasoline in the marketplace. The need for legislative relief to prevent the giant 79-549 0-81--25 integrated firms from unfairly and illegally destroying competition and hurting the public welfare is argued in Chapter VIII. The fate of competition in the gasoline industry and its flexibility in meeting the various needs of motorists is now in the hands of Congress. We believe that speedy action is needed by Congress to insure fair and equitable competition in the gasoline industry and that the public interest will be protected. This time structural change must be made rather than another attempt to remedy through regulations. General recommendations on how Congress can regulate permanent relief from those who wish to monopolize the gasoline industry are presented in Chapter VIII. CHAPTER I. GASOLINE MARKETING IN CONTEXT OF THE PETROLEUM INDUSTRY The 1970s have been a period of rapid change in the gasoline industry with more than 100,000 branded dealers going out of business from an estimated universe of approximately 300,000 total gasoline outlets. In this past year alone an estimated 17,000 stations have gone out of business (see Figure I). The attrition in number of stations is expected to continue for some time, with possibly another 50,000 units being closed. As this significant restructuring of gasoline marketing has been occurring, there has been a major decline in the share of gasoline sold by independent marketers and a sharp increase in gasoline sold by refiners and resellers direct outlets. The declining role of independent gasoline marketers has been brought about by a number of unfair and anticompetitive practices of the large integrated petroleum companies and their jobbers. Small business is on the precipice and can be virtually destroyed unless the refiners and their resellers are stopped from seizure of the gasoline industry. The large refiners and their distributors supply around 85 percent of the gasoline marketed at retail. From May 1972 to May 1979 the number of refiner supplied leasee dealers decreased from 111,534 to 54,526 or by 51.1 percent and the number of "open to buy" branded dealers similarly decreased from 93,268 to 52,395 or by 43.8 percent (see Table I). While more than 100,000 dealers were being eliminated, the number of refiner direct outlets increased from 11,125 to 13,927, an increase of 25.2 percent. Furthermore, there is reason to believe that the growth in direct marketing outlets is considerably understated. Over the last few years companies such as Gulf have eliminated large numbers of their dealers and have contracted with convenience store chains to "man" the units. Technically, Gulf may not "operate" the stations but they control the price of gasoline and derive all the revenues from the sale of gasoline. The share of gasoline marketed through refiner direct "operated" units has increased even more dramatically than the number of units themselves. The percent of gasoline sold through refiner direct "operated" units has grown from 12.67 percent in January 1972 to 25.78 percent by April 1979 (see Table 2). Furthermore, as noted in the previous paragraph, if all "controlled" and not just direct "operated" stations are included, the growth in refinermarketer share could be even more dramatic. While this report concentrates on developments in the gasoline industry, it is necessary to consider gasoline marketing as the final link in the vertically integrated petroleum industry. It will be shown that marketing is the fourth and final level in the petroleum industry and is the only level not to be dominated by a relatively few giant integrated companies. Up until the petroleum products shortages of 1973 the gasoline industry was highly competitive with hundreds of thousands of independent marketing agents offering different levels of services and prices designed to meet the needs of the driving public. It is largely since the shortages that several of the major petroleum companies have instituted plans to integrate forward and take over the gasoline industry. During more competitive times prior to the shortages PERCENT of JANUARY 90 100470,624) FIGURE I Station Population Falls in 1979 Despite the gasoline shortage, average HOW THE U.S. SERVICE-STATION POPULATION THE NUMBER OF U.S. service stations is estimated to have declined from 170,624 in January to 153,200 in December, 1979. Each point in the graph shows the percentages of stations compared with January. The percentage of stations open for business in December was 89.8% of what it was in January. Source: LUNDBERG LETTER, January 11, 1980 (reprinted with permission) |