Email

Sam’s Last Gallon of Gas

by | published March 21st, 2011

I am a great believer in the American entrepreneurial spirit. As an economy, we stand or fall by our ability to provide enough space to allow small-time folks to pursue big-time dreams.

However, when times get tough, some little folks end up under the bus.

Take Sam, for instance.

I introduced you to this fellow last summer in “The Future Price of Gasoline, According to Sam” (August 6, 2010). He is the proprietor of an out-of-the-way rural service station outside of Pittsburgh. I have known him for years.

Thanks to an arrangement with his only sister’s husband (he can never quite bring himself to call the guy his “brother-in-law”), Sam would get his gasoline delivery two days before most everybody else in the area.

And he would provide me with a two-day “heads up” on where local retail prices were moving. In that way, Sam became my ready barometer into the local gasoline market.

Stopped by his place this weekend, intending to chew the fat and catch up on the latest market musings from a fellow who has been there for more than 40 years.

Got something else instead.

Sam Is Throwing in the Towel

The station is closing.

Sam had an arrangement with one of the top five U.S. providers of retail fuel – you know, one of the “Big Boys.” He ran a quasi-independent operation. The station was his, but he was still required to contract for his gasoline with the Big Boy whose sign hung out there on the state road.

Sam was a proprietor but not completely his own man.

This Big Boy determined the pricing at the pump by setting the price Sam had to pay for the gas it sold to him.

When wholesale prices rose quickly – as they have nationwide over the past several weeks – guys like Sam could not pass all of that increase on to the retail customer. The competition just down the road, in the larger communities, would eat him alive.

So, just like last summer, that meant he was stuck relying on sales from his tiny convenience store – maps, candy, etc. – to make up for the shortfall at the pumps.

This time, however, something else was afoot.

The Oil Major Ran Him Right Out of Business

I asked Sam if the station would revert back to the company on the sign, the one having a contractual right to set his prices.

“No,” Sam answered. “[—] has decided to consolidate its brand market share and redirect traffic to its larger stations locally.”

Sam’s station only has six pumps (when they are all working). He has a difficult enough time competing as it was. This time around, [—] made it impossible to compete by effectively reducing his margins to virtually zero.

By deliberately pricing his gasoline high, the unnamed Big Boy just ran him out of business.

As I said, Sam could never just charge what he needed to overcome the shortfalls. Nor could he cut his prices to generate additional business, hoping to increase sales volume.

For one thing, he had insufficient alternative revenue flow to make it for very long.

Besides, he is tied into a supply agreement with a major vertical oil company, the kind that controls the process from fields through refineries and distributors to setting the effective price at retail outlets, even those the company does not control.

If Sam did try to cut prices to generate business, the Big Boy providing the product would penalize him for undercutting the larger distribution market (which is home to other stations owned by or leased from the major).

And, in any event, the major makes far more money controlling access to product area-wide than it gets paid by the likes of Sam. So the Big Boy’s control over pricing is increasingly important to its bottom line.

If the major decides it is time for guys like him to leave the business, Sam has nowhere to go.

Genuine Competition Is Falling By the Wayside

Sam’s son Tony was also working when I stopped by.

I asked Tony if he would buy the station, to keep it in the family. He simply shook his head.

“No future here,” he finally admitted.

Nobody else is likely to buy it, either – at least not as a gas station. They will probably dig up the tanks, do an EPA evaluation, and ultimately turn it over to the next apartment complex developer.

OK… so I recognize that this is how markets operate. The planned destruction is needed to make way for the next generation of development.

Only the next time you complain about the rising price of gasoline, remember this: One of the primary reasons the price can rise so quickly – and stay there – is the decline in genuine market competition. And a good part of the lack of competition comes from having fewer Sams.

We will still see each other now and then for a beer at the VFW hall. But it won’t be the same.

I have also lost my “early window” into local market prices.

Then again, there should be a bigger station that also has an early delivery schedule. But how do I strike up a conversation with a credit card slot?

Sincerely,

Kent

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. Annabelle Herbert
    March 21st, 2011 at 14:33 | #1

    Won’t there be a niche for a smaller oil company to supply these quasi independent and independent operators?

  2. S comer
    March 21st, 2011 at 14:33 | #2

    Too bad about Sam, been watching this happen since the 50s in CA
    especially gas stations , but also in other sectors as well !
    yup , we’ll all pay in the end , no pun intended!, S

  3. adrian bernal
    March 21st, 2011 at 14:40 | #3

    so many issues in owing your own business.how sad but he did last a long time.thank you dr kent for sharing a true life experience
    adrian bernal

  4. Kevin Beck
    March 21st, 2011 at 15:01 | #4

    What a strange relationship this created. The company that supplies him wants to run him out of business. It’s a sad sad situation that his supplier is also his competitor. A good reason to align yourself with a supplier that will allow you to be truly independent. It’s a little difficult to be tied by a contract to your supplier, but not having the full support your supplier/franchisor should be giving you.

  5. sal lipuma
    March 21st, 2011 at 15:39 | #5

    Kent, very respectfuly, you left out the part when you handed your life long freind (Sam) 2 or 300k so he could go fishing.With millions and millions, i know you did….right?

  6. Former Helios victim
    March 21st, 2011 at 15:40 | #6

    Every gas station has to report online until 10 am every morning (except Saturday and Sundays) the retail prices of 2 to 4 selected gas stations in the vincinity of your station. If you have a marketing contract(where the company makes the price and you get 5 cents per gallon) you get notified until 11 am through the POS system the price you have to charge. By noon you have to change the identifier (Gas price column) and the POS system. The “free” market “balances” the good old capitalistic way.

  7. Ed
    March 21st, 2011 at 15:48 | #7

    It’s The American Peoples Fault That the GAS Prices Are So High,There STUPID Letters Have Gone Around People on The Radio Ect. Have Told them Don’t buy Exxon or Mobile NONE! Buy Another Brand Etc. Till they lower the price and keep doing that from one place to another get the PICTURE !!

  8. sal lipuma
    March 21st, 2011 at 16:09 | #8

    My last comment about helping Sam to go fishing at last, i admitt was ment to prob your soul. There is no question of your extreme know how of the energy industry and your very capable way of making it easier to grasp by the layman. I guess it would be nice to be able to detrmine your true intent for helping the little guy.Being just a man myself,it is not poss.to see clean thru you and im not judging you.Point,It would be great if someone with your ability was truley wanting to help…in a world seemingly filled with…well, not enough helpers.

  9. John
    March 21st, 2011 at 18:23 | #9

    Re: former Helios victim. As the owner of a gas station wearing Sam’s boots, (but still in business), and an independant, I report nothing and am free to set my prices. I wish I could be guaranteed a 5 cent margin! Regardless, the taxes imposed by the gov’t here in the Great White North are bloody ridiculous. How would you like to pay our current gas prices of $5.10 per US gallon? And see a margin of $.05? When I got into this business we could usually count on margins nearing 10%. I’s sure like to see that today! Through hard work, good staff, longer hours, etc.this business has gone from grossing a bit above $1 mil in 8 years to see grosses of $3.5 mil and stillI’m not pocketing any more $$$. I empathize strongly with Sam! Anyone want to buy a business?

  10. tlmalnick
    March 21st, 2011 at 19:10 | #10

    all ready in place;cap and trade!law of the sea treaty!freeze on domestic oil production!death panels deciding if you should live or die when you get too old!orders to officers not to enforce immigration laws!expanding the role of the military in ‘domestic security’!all provided by OUR GLORIOUS PRESIDENT TO CIRCUMVENT OUR CONSTITUTION LAWS!! WE have enough oil to cover the world usage for the next 72 years plus right here in the USA GROUND and obama wants us to go broke buying foreign oil so we are under his controls and future “SOCIALISM “

  11. clay hett
    March 21st, 2011 at 21:31 | #11

    hey kent if u ever make it up to the chilcotin, i’ll buy the first beer!!

    cheers clay hett eagle lake ranch

  12. John
    March 21st, 2011 at 21:49 | #12

    @Ed
    In reply to Ed’s comment about the customer “effectively running the gas company out of town”. I have a sister that lives in Australia and they apparently used this method some years ago. And it worked, although I don’t know for how long.

  13. Terry
    March 22nd, 2011 at 01:46 | #13

    I think we have always known this is the case since there are so few refineries and competition has disappeared from the market place. Every gas station has the same price for gas within one or two cents. I have a question regarding selling the Toshiba stock. Since the rolling brownouts in Japan have effectively stopped factories even in areas that are undamaged wouldn’t the small size nuclear reactors be a perfect source of reliable electricity for each factory to resume production.

    Obviously there are other factors, such as the problems created with their “Just in Time” manufacturing leaving them with a lack of parts inventories and perhaps all their people can’t get to work. If these were overcome I believe, after having lived there for some time, the Japanese are nothing if not practical and that these small power plants might work to get factories running again. Ergo, buy Toshiba. If I thought of it I’m sure someone else has too.

  14. doug
    March 22nd, 2011 at 08:10 | #14

    This business practice is not confined to gasoline. Levi Strauss and others have been fixing prices for retailers for years. and now they have thier own outlets nearby. Then of course there are direct internet sales from the manufacturer to “compete with”.

  15. Don Fishgrab
    March 22nd, 2011 at 08:29 | #15

    As a plumber, I was aware of this from the standpoint of water heaters. There used to be a hundred manufacturers in the USA. now there’s three. Walmart and a few other major chains have taken over the retail business and driven out most small companies. It has made us susceptible in every area.

  16. Jerry B.
    March 22nd, 2011 at 11:12 | #16

    De ja vu all over again. 40 some odd years ago, my father left the world construction business to retire in the California gold and run his own service station. Just like Sam, he owned it but was “beholden” to one of the “big boys”, company name starts with an “S”. After a number of years of cutting his gas profits to nothing and relying on his garage svc to make a profit, he finally called it quits. He had invested his lifes savings into this endeavor and got out with a fraction of what he went in with. When he passed he left my mother with a small pension, social security and a very small savings account. Not exactly the American Dream one plans on.

  17. D on Anderson
    March 22nd, 2011 at 15:43 | #17

    the people in big oil do not deserve to sleep. if i had one in my family i would disown him/her.

  18. Nick
    March 23rd, 2011 at 17:31 | #18

    The BIG get BIGGER and the small get pushed to the wayside it’s the modern American way! I grew up in a garage in the early 60’s my father ran it with a partner, they fixed cars, farm equipment,sold gas and made a $1. I happened to stop in the old place a few weeks ago. The garage is now a restaurant,as there are so many different makes and models of vehicles it’s next to impossible for an independent shop to survive trying to keep up with the necessary equipment to fix these vehicles. So invaribly they go back to the BIG dealership where they were purchased to get serviced at $150 an hour. As for the gas bar its being run by New Canadians who have Samosas for sale by the till for $1 each. Thank you very much please. I hate to admit it. I’m working for BIG OIL on a 4 month term contract( I needed a job, I was off work for a year) No benefits and I don’t get 75% of my pay until the end of the term 🙁 I guess they’re strapped for cash! I’m wondering. When are we going to start rioting in the streets in the USA and Canada?

  19. Steve
    March 26th, 2011 at 19:51 | #19

    The photo business of the early ’90’s is a prime metaphor for Sam’s plight. Big yellow began competing
    with the small processor. Digital printers using 2 mg ccd’s were a 100 grand a pop offering digital control
    over printing results. Silver halide was still king and would remain so according to the leading scientific and industry journals, sponsored by the propagandists of that era, crowing that digital photography would “never” approach the quality of 100ASA film let alone Kodachrome. We all know the lagacy.

    I see the automobiles of today where photo technology was in 1990. $5-$10 gas will hasten the demise of oil as the fuel for mobility. This oil shock will be lasting and painful for sure, but it will be the last one.

  20. Lance
    March 27th, 2011 at 09:03 | #20

    Dr Moors, I recently saw a prediction that US uranium supplies are growing increasingly shorter as world demand rises, especially so if, as expected, the Russian government decides against renewing a decades old treaty allowing the US to buy spent spent nuclear material. Are either of these statements true and, if so, what are the implications for prices and markets?

  21. brian s
    April 4th, 2011 at 11:45 | #21

    Sam’s Last Gallon of Gas: This seem symptomatic of most small businesses. Restaurants, auto repair, gas stations or any other profitable ventures are owned, for the most part, large multi-nationals or a few rich families. At what point in this epoch do people notice that there is something very wrong about this economic experiment?

  1. No trackbacks yet.