CHAPTER VI

SUMMARY OF FACTORS EXPLAINING THE IMPENDING DESTRUCTION OF SMALL BUSINESS IN THE GASOLINE INDUSTRY.

1. Gasoline marketing is the last stage in the integrated petroleum industry.

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Earlier stages of integrated petroleum industry include crude oil,
pipelines and refineries. These sectors of the petroleum industry are
dominated by the twenty largest integrated firms.

The final stage of gasoline marketing has historically been performed by
hundreds of thousands of independent marketers providing a variety of
services and prices associated with the marketing of gasoline.
The major integrated petroleum companies treated marketing as a
means of converting their highly profitable crude oil into cash and
greatly overbuilt marketing facilities in the 1950s and 1960s.

Approximately 85 percent of all gasoline carries a refiner's brand.
Historically refiners have relied upon independent branded dealers to
sell most of the gasoline.

There are two types of branded dealers: the leasee dealer and the open dealer.

The largest method of branded marketing has been through leasee dealers where the refiner is both the supplier and landlord to dealers. The open to buy branded dealer owns or controls the service station facilities which he operates.

Approximately 15 percent of the gasoline is sold by private brand marketers that control their own brand.

Historically the major brand gasoline has been sold on a full service, convenience basis, with credit cards and with the support of extensive advertising.

Private brand approach has been the major alternative to the major branded method of marketing and has been based upon relative few, high-volume, limited service, low price stations.

Major brand jobbers have often acted as supplying agents to dealers in smaller markets, as well as in some of the major metropolitan markets. The United States experienced a domestic energy shortage during 1973 which became an energy crisis in 1974 as a result of the Arab Oil Embargo.

15. The petroleum products shortages destroyed the normal workings of supply and demand in the marketplace.

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The petroleum products shortages gave refiners additional power over the independent marketers since they had no viable alternate sources of supply.

17. Since the beginning of the petroleum products shortages in 1973 there has been a major attrition of branded and private brand dealers as well as some jobbers of petroleum products. More than 100,000 dealers have gone out of business.

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Over the years the rights of branded dealers have been usurped by their landlord-suppliers through the power of the short term lease.

19. Refiners have regularly infringed upon the rights of their independent dealers regarding hours of operation, acceptance of company promotions, sales of company's TBA, and the pricing of petroleum products and selling of only the refiners' products.

20. The major refiners used the short term lease to not only closely control the activities of their dealers, but to also terminate leases and take over the locations for company operated stations.

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Tens of thousands of dealers were cancelled or the leases not renewed who had served their suppliers well for many years.

22. Congress enacted the Petroleum Marketing Practices Act in June 1978 to deal with the one-sided relationship existing between the supplier and the leasee-dealer.

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The Act was intended to curtail the capricious and arbitrary termination of dealers and to reduce refiners' control over the actions of independent businessmen.

24. Congress acknowledged that the Petroleum Marketing Practices Act dealt with only one of two major classes of problems that were destroying branded as well as private brand marketers.

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Refiners were also found to be destroying independent marketers through a set of techniques resulting in "economic eviction".

26. Techniques of "economic eviction" used by refiners to eliminate dealers include rent increase, supply and price discrimination and below cost selling of major direct operations.

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With the passage of "Dealer Day In Court" legislation in June 1978, the principal method of eliminating dealers and replacing them with company operations has been "economic eviction".

Economic warfare has also severely injured "open to buy" branded dealers and private brand marketers.

The last year of relative normal market conditions before the petroleum shortage was 1972.

From 1972 to 1979 the market share of direct outlets increased from 12.67 percent to 25.78 percent of the gasoline supplied by refiners. Several of the large integrated petroleum companies have wiped out large segments of the dealer operations since 1973 as they have integrated forward into direct marketing.

Leaders in abuse of the power of being a supplier in a period of shortage include Gulf, Sohio-B.P., Marathon, ARCO, Citgo, Hess, Mobil and Crown.

Sohio provides an example of how rapidly a major marketer in an area can convert to direct marketing operations after it has destroyed its dealer system.

From 1972 to 1979 Sohio's direct marketing share increased from approximately 25 percent to approximately 75 percent of its total in the state of Ohio.

Five of the larger refiners including Exxon, Amoco, Texaco, Shell and Chevron have not as a group expanded their direct marketing operations.

These large refiners had another goal which was for the time being more important than expansion of direct marketing. They wanted most of all

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for the President and Congress to decontrol crude oil and pass a windfall profits tax which would be as favorable as possible to the oil companies.

Some of the larger refiners are waiting to see what Congress' response will be to the rapid expansion of direct marketing operations by several other refiners.

The five large refiners who have yet not expanded their direct marketing have studied, or have considerable experience in running, direct marketing operations.

Exxon has a direct marketing operation which is responsible for 16 percent of its gasoline sales.

At the right time these large refiners who have been on the side-line could rapidly expand their direct marketing operations.

Those refiners who have moved rapidly into direct marketing since 1972 have used a variety of unfair and illegal acts to destroy their dealers and to make way for their direct company operations.

Dealers have been forced to compete primarily on a service basis as a result of the structuring of the dealer tankwagon system.

The dealer tankwagon system has deliberately made occupancy cost into high variable cost making it extremely difficult for dealers to compete on a high-volume, low-price basis.

In addition to holding the branded dealer to the high tankwagon price,
the major refiners have discriminated on a volume basis in favor of their
direct company operated units.

Ruinous rent increases were also used by refiners to destroy their
dealers and to make way for direct company operated stations.
Some refiners have cancelled the historic discounts to "open to buy"
dealers that own their own real estate making it unattractive for
independent investors to own and operate branded stations.
Finally, refiners with direct operations have engaged in below cost
selling and marketing subsidization and have destroyed both branded
and private brand marketers.

Refiners have used branded jobbers as their wholesale marketing.agent.
in some marketing areas.

Some jobbers have unfairly used their wholesale margins to extend their
direct branded marketing operation at the expense of branded dealers.
Where branded jobbers have expanded their direct marketing they have
started with a 4 cent buying advantage and have used this additional
margin to destroy dealers of the same and different brands.
Since the passage of the Petroleum Marketing Practices Act refiners
have used buy-out and statements of planned closing of stations as a
means of continuing to cancel leases and eliminate dealers.

52. With the beginning of the petroleum products shortages, Congress passed in 1973 the Emergency Petroleum Allocation Act.

53. Congress recognized that with the shortage refiners could take advantage of their dominant position to destroy small business competition in gasoline marketing.

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A central provision of this Act was that the Executive Branch of Federal Government was to create an agency that would prepare regulations "to preserve the competitive viability of the independent refiners, small refiners, non-branded independent marketers and branded independent marketers".

Another important provision of the Act was to insure equitable
distribution of refined products at equitable prices.

The Emergency Petroleum Allocation Act was an excellent law, but it
has not been properly implemented and enforced by the D.O.E.
The D.O.E. has failed in many respects as outlined below to carry out its
mandate to preserve the structure of competition and to protect small
businessmen:

(a) A new base period was established at the request of refiners which
greatly favor their direct operated units and hurt branded and private
brand independent marketers.

(b) Regulations were not written that provided for equitable distribution of supply to all marketers, and refiners favored their direct operated stations at the expense of branded dealers.

(c) The regulations encouraged refiners to directly operate old stations, and to contruct new units, which were favored with large allocations.

(d) The regulations permitted refiners to change the normal business practice with their dealers and to pass on to dealers ruinous rent increases.

(e) The regulations permitted refiners to bank both product and nonproduct cost increases, while retailers were permitted only to bank. product cost increases but not nonproduct cost increases.

(f) The regulations encouraged the subsidization of marketing from refining profits, and the forward integration of refiners into direct marketing operations.

(g) The new margin regulation required that refiners continue to subsidize their direct marketing operations.

(h) The regulations have failed as required to bring about equitable
wholesale pricing of gasoline. As a consequence, many dealers can only
buy high priced gasoline which has destroyed and continues to destroy
their ability to compete.

Many of the D.O.E. regulations have helped the large petroleum
companies to take advantage of their position as supplier during times
of shortage and to integrate forward into direct marketing.
The actions of the integrated petroleum companies, and regulations
which were frequently written at their request, are unfairly destroying
small business and the viability of competition in gasoline marketing.

CHAPTER VII

PRAYER THAT CONGRESS IS INTERESTED IN PRESERVING A COMPETITIVE GASOLINE INDUSTRY AND WILL PROVIDE LEGISLATIVE RELIEF

We hope that the reader of this report will have a better understanding of the complex nature of the petroleum industry, and that the reader will place marketing into its appropriate context within the vertically integrated petroleum industry which is composed of several multi-billion dollar integrated firms as well as tens of thousands of small businesses. It is the final stage of the petroleum industry-the marketing level-where small businesses have played the key role and the marketing function is not dominated by the multi-billion dollar firms. Sadly, several of the large integrated petroleum companies are proceeding on a course of action, which if allowed to continue, will result in the destruction of hundreds of thousands of small businessmen as the large firms complete their integration from production of crude oil through the marketing of gasoline to the public.

The reader will hopefully realize upon completion of this report that branded marketers, private brand marketers and jobbers are highly efficient businessmen in providing a variety of services, products and prices as desired by the marketplace. It should be understood that it has only been since the petroleum products shortages beginning in 1972 that the large integrated companies have committed themselves to a course of action designed to eliminate small business. They are able to integrate forward at this time and destroy small business since the petroleum products shortages and government regulations have destroyed the normal workings of supply and demand and have placed many of the large refiners into a monopolistic position relative to their marketing customers. Taking advantage of their power as suppliers, many of the large refiners have practiced price. discrimination, supply discrimination and have sold below cost in marketing, all of which have had the effect of destroying independent marketers and doing irreparable harm to competition. The large companies have been aided and abetted in the process of unfairly destroying small business by numerous failures of the Department of Energy to write and implement regulations needed to preserve competition as mandated by Congress.

We pray that the Public and the Congress will be incensed by what they read which we present to be the truth to the best of our knowledge. Congress should understand that its mandate to the executive branch of government written into law with passage of the Emergency Petroleum Allocation Act of 1973 has not been carried out. What Congress wisely described as actions needed to preserve competition during the period of petroleum products shortage has not occurred and the viability of the competition of the petroleum industry has been severely and irreparably harmed. Finally we pray that Congress will enact new legislation that will reverse the unfair and illegitimate gains of the large integrated companies, and will stop them forever from integrating forward into marketing, and from interfering in any manner in the process by which gasoline is marketed.