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Zones of Contention in Gasoline Pricing

Refiners charge each dealer a different rate for the same fuel. They say it's fair, but critics contend the practice helps them boost profits and suppress competition.

June 19, 2005|Elizabeth Douglass and Gary Cohn | Times Staff Writers

On a recent Wednesday, 72-year-old veterinarian Charles Hendricks filled up his Mercury Grand Marquis at a Chevron in west Anaheim. On the other end of town, 22-year-old sandwich store manager Ryan Ketchum gassed up his Nissan Sentra at a Chevron in Anaheim Hills.

Both men bought regular gasoline. Both pumped the gas themselves. But there was one important difference: Hendricks paid $2.399 a gallon, whereas Ketchum paid $2.539 -- 14 cents more a gallon for the same Chevron gas.

Such price variations may seem odd, but they are not unique to Anaheim. On any given day, in any major U.S. city, a single brand of gasoline will sell for a wide range of prices even when the cost to make and deliver the fuel is the same.

The primary culprit is zone pricing, a secret and pervasive oil company strategy to boost profits by charging dealers different amounts for fuel based on traffic volume, station amenities, nearby household incomes, the strength of competitors and other factors.

For The Record
Los Angeles Times Friday June 24, 2005 Home Edition Main News Part A Page 2 National Desk 2 inches; 73 words Type of Material: Correction
Gasoline price series -- A map with an article in Saturday's Section A about oil refiners' practices showing gasoline costs gave the correct price of gasoline in South Carolina, $2.01, but pointed in error to North Carolina. Also, an article in Sunday's Business section about how refiners set wholesale gasoline prices misspelled the last name of the director of retail pricing at the Oil Price Information Service. He is Fred Rozell, not Rozelle.

It's a controversial strategy, but the courts have thus far deemed it legal, and the Federal Trade Commission recently said the effect on consumers was ambiguous because some customers got hurt by higher prices while others benefited from lower ones.

To be sure, other industries vary prices by area too. Supermarkets, for instance, price the same brand of bread or cheese differently in different neighborhoods. But gasoline price patterns provoke a response that bread can't match, partly because other commodities don't fluctuate as wildly as gasoline does and their prices aren't posted by the side of the road.

Oil companies say the practice allows them to adapt to local market conditions by, for example, lowering prices to dealers who face stiff competition from high-volume sellers such as Costco Wholesale Corp.

Most California gasoline retailers, however, declined to discuss their pricing practices, referring questions to industry groups.

"It is a perfectly acceptable form of pricing," said Joseph Sparano, president of the Western States Petroleum Assn., a Sacramento-based industry trade group. Zone pricing, he said, "is a way for companies to price fairly in different areas."

Said Trilby Lundberg, who produces the widely quoted Lundberg Survey of gasoline prices: "The flip side ... is that locational pricing allows for prices to be lower in some areas than others."

Such explanations haven't appeased consumer groups, lawmakers and state government critics such as Connecticut Atty. Gen. Richard Blumenthal, who has tried to outlaw the pricing method, calling it "invisible and insidious."

"Zone pricing, on paper, sounds reasonable; in practice, it's despicable," said Michael Shames, executive director of the Utility Consumers' Action Network, a San Diego group that has tracked regional gasoline prices for almost a decade. "It undercuts price competition."

The issue has particular resonance with consumers in California, where retail fuel prices are among the nation's highest and annual gasoline consumption outpaces demand in all but Japan and the United States as a whole.


Dissecting Prices

Quantifying the effects of gasoline zone pricing on consumers, however, remains a difficult task. That's partly because the mechanics of the strategy are kept secret and partly because the effects on consumers -- in terms of cents per gallon -- are constantly changing.

In addition, zone pricing kicks in at the end of a chain of complex transactions that take place between the oil well and the corner gas station.

The largest chunk of the price of gasoline, about 50%, is a reflection of the cost of crude oil, the raw material used by refineries to make fuel. Experts say that for every $1 jump in the cost of a 42-gallon barrel of crude, there will be a 2.5-cent-per-gallon increase in gasoline prices.

In California, sales and excise taxes also are a big part of the final tally. At today's prices, taxes represent about 55 cents a gallon -- a number that rises and falls along with retail prices because the sales tax is assessed as a percentage of the bill.

Critics say zone pricing is another factor that keeps the state's retail prices well above the national average; California prices have been as much as 50 cents higher than the average for the country as a whole.

"The whole reason that people care about zone pricing is that they believe that this causes higher gas prices," said Justine Hastings, a Yale economics professor who has studied the phenomenon. Consumer groups and others are suspicious of the practice, she said, because to make it work, "it requires a substantial amount of market power on the part of refiners."

In California, refiners have that power in the form of an oligopoly in which a handful of companies control the market, according to consultants for the California Energy Commission and economists.

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