Why gas costs so much in this area
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George Wyrsch has been called a gouger, and he says customers are deserting him in droves.
He has two choices: Cut his gas prices and go broke, or keep them at $1.52 and watch customers hunt for a better deal.
Gas-station owners such as Wyrsch say they would like to shop around for the best wholesale price, but they can't. They can buy gasoline only from four suppliers who control the one pipeline for King, Pierce and Snohomish counties.
Those big oil suppliers dictate gas prices based on secret formulas, they freeze out competitors who could deliver cheaper gas, and they run corporate-owned stations that undercut and drive independents out of business. And, as oil companies point out, it's legal.
Gas prices are higher in the Puget Sound area than in almost any other part of the country. Last week, the average for regular unleaded was $1.14 nationally, compared with $1.37 in Washington state and $1.44 in the Seattle metro area, AAA says.
The roots of that disparity are only partly tied to supply and demand. Oil companies and independent dealers — who don't agree on much — partially agree on one key reason we pay more: a lack of competition among suppliers and gas stations.
The companies that refine the oil — Phillips, Equilon, Arco and Tesoro — also transport it, distribute it and sell it, either themselves or through others.
The consolidation around Puget Sound has been dramatic. In 1981, seven oil companies controlled 72 percent of the retail market in the area, leaving the rest to independents. By 1998, four companies controlled 94 percent of the stations, and four refineries controlled nearly the entire supply, according to Auto United Trades Organization, a group of independent stations.
Even with the wave of oil mergers in recent years, the nation as a whole is more competitive. The top five oil companies control 60 percent of stations nationally, according to Public Citizen, a watchdog group.
"The reason we pay more in the Seattle area is because a handful of oil companies have a stranglehold on the market and are preventing any form of competition," said Tim Hamilton, executive director of the Auto United Trades Organization. "It's the kind of stranglehold they do not yet have in other parts of the country."
Fred Gorell, a spokesman for ChevronTexaco, would not talk about the amount of competition in the metro Seattle market, but he said wholesale and retail competition keeps prices lower in Los Angeles than in San Francisco.
"More competition would drive down the price, all things being equal," Gorell said.
Gas pricing involves more than supply and demand. It starts with crude oil, which is shipped to refineries and made into gasoline and other fuels. In Washington, there are four major refineries — two in Ferndale, Whatcom County, and two in Anacortes.
Most gas from those refineries is shipped down the 400-mile-long Olympic pipeline — owned by British Petroleum and Equilon — through Western Washington and part of Oregon. Delivery trucks fill up at distribution points along the pipeline. That's where pricing gets complicated.
Oil-company and independent distributors buy gas under one of four price classes.
Wyrsch and other dealers would like to be able to buy one of the cheaper classes, but they aren't allowed to. Washington's four suppliers — which sell under the names Arco, Shell, Texaco, Chevron, 76 and Tesoro — forbid independent distributors from selling the cheaper gas inside King, Pierce and Snohomish counties, Hamilton said. Stations must sign exclusive contracts with the oil companies to buy gas that is usually the most expensive.
The oil companies have won all challenges to that practice. Courts have said letting independent distributors sell here could hurt oil companies that have invested in stations. Courts also have said the system allows for an efficient supplying of gas, Gorell said.
Gas prices have risen slower than inflation recently, he said, and that's evidence of fierce competition.
The court rulings benefit oil companies because they enable the companies to dictate prices. Under a computerized system called "zone pricing" that oil companies keep secret, gas stations are charged different prices, Hamilton says. Prices are based on what appear to be a variety of factors — location, affluence, proximity of competitors, customers' willingness to pay.
Take Randy Schatz, who runs a 76 station in Mill Creek. Last week, his supplier charged him $1.22 wholesale. In North Bend, Wyrsch's supplier charged him $1.24 at his Texaco station.
Less than a mile away, Wyrsch's other supplier charged him $1.32 at a Chevron in a prime freeway location.
Three prices for the same gas delivered by the same truck.
Even worse, Wyrsch says, a corporate-owned Chevron 10 miles away in Issaquah was selling gas at the same time for $1.25, less than he was charged for it.
The only reason Wyrsch is forced to pay more, he figures, is that North Bend has fewer competitors. Oil companies, he says, think most people won't drive more than a couple of miles for cheaper gas, so they can charge higher prices at his station.
"Higher gas prices are caused by the major oil companies, who restrict access to gasoline and then use zone pricing to maintain the highest possible prices at each location," Wyrsch said.
Cameron Heimbigner, who has been in the gas business 33 years, wonders how long he can last. Last month, he wrote to Chevron to explain his predicament.
"I am losing customers daily who do not understand (that) Chevron is charging me 9 cents per gallon more per truckload than it charges retail for the same gas at its nearby company-operated outlet," he wrote.
The ability of an oil company to control oil from the ground to the car eliminates so many costs that corporate-owned stations can always charge less, Wyrsch said. Independent stations, he said, lack the ability to cut prices and can't mount a price war, because there are so few of them.
Schatz's nemesis is a company-operated Chevron a couple of miles north of his Mill Creek station. The rival was selling gas at $1.31 last week, a few pennies above his wholesale cost and a price he can't compete with.
He also can't compete with companies such as Costco, which pay less because they are able to negotiate better deals with oil companies.
Schatz wasn't surprised to hear that Costco in Issaquah was charging $1.07 a gallon last week, while stations in Seattle's Queen Anne neighborhood were charging $1.53 to $1.59.
"Why do the oil companies charge more for gas on Queen Anne? Because they figure nobody's going to drive down the hill somewhere to get cheaper gas," Schatz said.
Oil companies argue that zone pricing is competitive. They say it allows them to cut prices for stations near a low-price rival without cutting prices everywhere and hurting the industry.
Regulators don't buy the logic, but they say it falls through the cracks of antitrust laws. In May, the Federal Trade Commission shut down a three-year investigation of zone pricing in Washington, Oregon, California, Nevada and Arizona and determined that big oil suppliers broke no antitrust laws.
Sen. Ron Wyden, D-Ore., has been the most vocal critic in Congress.
"America's oil companies tried to pull off a financial triple play, boosting profits by reducing refinery capacity, tagging consumers with higher pump prices, and then arguing for environmental rollbacks and additional financial incentives," Wyden said after the investigation.
To prove an antitrust violation, regulators need proof of collusion, and Hamilton says regulators have none.
Some say Washington state's gas prices are higher because the state is geographically isolated from supplies.
Some oil-industry advocates, such as Vice President Dick Cheney, blame the Environmental Protection Agency, saying restrictions prevent refineries from being built.
But supply is not the problem. Washington uses about 125 million barrels of fuel a year, and its refineries produce 216 million barrels, according to the National Petroleum News Market Facts. The extra is shipped to other states or countries, Hamilton said.
Taxes aren't to blame, either. Washington's state gas tax is 23 cents, which ranks 23rd nationally, said Janet Ray, a spokeswoman for AAA Washington.
Rising demand helps keep prices up. State drivers consumed 2.7 billion gallons of gas in 2000, a 17 percent increase from 2.3 billion in 1990, according to the National Petroleum News Market Facts.
Tina Kondo, antitrust division chief at the state Attorney General's Office, said the higher prices in the state can be a burden.
"Lots of people drive," Kondo said. "They drive long distances. More than half the vehicles on the road are trucks and SUVs, and the state population is going up."
Then there's competition. It has decreased, although state officials have tried to keep oil companies in line, Kondo said. The state has forced oil companies to divest as part of merger negotiations and has stopped the companies from getting more powerful, she said.
But they already have a lot of power. The four companies in Washington state now control at least 96 percent of the retail market, Hamilton said.
In other states, such as Texas and Georgia, 15 to 20 percent of the market belongs to stations that don't sell brand-name gas. Those stations are free to shop around for the best wholesale price and offer a competitive alternative to the big brands, Hamilton said.
"What makes them charge $1.21 to one location and $1.41 to the next? It has absolutely nothing to do with manufacturing costs or transportation costs or anything like that," Hamilton said.
"It depends on the competition. But because oil companies have such a lock on Puget Sound, ... the prices are higher here than in other parts of the state or the country."
Luke Timmerman can be reached at 206-515-5644 or ltimmerman@seattletimes.com.