Zone-pricing politics

April 17, 2000
A new snake has slithered out of the gasoline-politics swamp, hunting for oil companies.

A new snake has slithered out of the gasoline-politics swamp, hunting for oil companies. It's a would-be controversy over zone pricing of gasoline sold for resale.

It seems the unusual but altogether explainable first-quarter bump in gasoline prices caught the attention of the chronically suspicious, including Connecticut Atty. Gen. Richard Blumenthal. He nosed around in the wholesale market and learned how refiners accommodate logistical necessity, then trotted up Capitol Hill to declare it all a scandal.

The threat that Congress might respond to misplaced alarm over zone pricing should be easy to deflect. But this is an election year, when politicians are prone to mischief. What is worse, the witch hunt dredges up misperceptions harmful to refiners and to a market that serves consumers very well.

Practicality and prudence

There's nothing sinister about area distinctions among wholesale prices. Market conditions vary from place to place. Prices should vary from place to place as well. That oil companies identify zones of varying influence is simply practical. That they do not reveal how they make pricing decisions within those zones is simply prudent. Anything different would look like collusion.

Blumenthal offered a much different characterization to the House Judiciary Committee Apr. 7.

"Zone pricing is invisible and insidious," he said. "It distorts the free market. It is possible only because of restrictive contracts that include sole-source provisions. It benefits only the oil industry, to the detriment of consumers."

An important dimension of the sole-sourcing Blumenthal so dislikes is branding, benefits of which to consumers and dealers alike naturally escape the notice of an indignant attorney general. Along with branding sometimes go commitments by franchise dealers to buy product from certain wholesalers. Commitments of that type do not immunize wholesalers against competition on the street.

To Blumenthal, however, wholesale business practices give major oil companies power "to charge inflated, excessive, arbitrary prices." That's preposterous.

Zone pricing and related market mechanics didn't happen onto the scene this year. If they truly gave oil companies the power Blumenthal describes, the annual average US price of gasoline in 1998, adjusted for inflation, would not have reached its lowest level in 81 years of recorded history. And the monthly gasoline price would not have reached its lowest level ever in February 1999.

If zone pricing truly gave refiners power to manipulate gasoline prices at consumers' expense, last year would not have been, in the words of a recent analysis by Purvin & Gertz, "one of the worst years in the past 2 decades for US refining margins." And why were margins low? Competition kept product prices from rising in step with refiners' crude costs. Prices are high now because product inventories depleted. Competition will correct that problem, too, if politicians let it happen.

Blumenthal is trying to stir up controversy in an area about which he either knows too little or ignores too much. Competition is intense in the gasoline market, which is why healthy profitability within it had been chronically difficult to achieve until the recent, fleeting shortage. It is why gasoline, despite increasing quality, rising environmental costs, and taxes forever creeping upward, is dirt cheap nearly all the time.

Dangerous misunderstanding

Blumenthal suggested to the Judiciary Committee that zone pricing violates federal antitrust law. And he recommended that Congress prohibit zone pricing or the elements of it he considers offensive.

His recommendations would hurt consumers who don't need help from the federal government. They should receive no serious attention from Congress. Oil companies shouldn't ignore them, though. The misunderstanding from which they emerge is profound and dangerous. And it seems never to go away.