Gasoline Price Outlook: An Epitaph For Sam the Service Station Man

[Editor's Note: In today's essay, Dr. Kent Moors - a frequent Money Morning contributor and a consultant to some of the world's largest oil-producing nations - relates a personal anecdote that provides some real insight into his gasoline price outlook. Dr. Moors' story certainly explains why he expects gasoline prices to head even higher.]

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I am a great believer in the American entrepreneurial spirit. In fact, the U.S. economy stands or falls on our ability to provide enough space to allow small folks to have big-time dreams.

However, when times get difficult, some little folks end up under the bus - along with their dreams.

To understand what I mean, let's take a look at my friend Sam.

Many of you may remember Sam, the proprietor of an out-of-the-way rural service station situated outside of Pittsburgh. I introduced him to Money Morning readers last summer in an essay: Gasoline-Price Forecasting: What Sam the Gas Station Owner Knows That We Don't.

I've known Sam for years.

So I was stunned to discover that he's throwing in the towel.

The End of an Era

Over the years I've known Sam, he's become my ready barometer into the local gasoline market. Due to an arrangement with his only sister's husband (he can never quite call the guy his "brother-in-law"), Sam would receive his gasoline delivery two days before just about everybody else in the area.

In turn, Sam would provide me with a two-day "heads up" on where local retail prices were headed.

I stopped by Sam's station this past 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.

But I got something else, instead - a real shock.

Sam's 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." Although he ran a quasi-independent operation - and the station was his - he was still required to contract for his gasoline with the Big Boy whose logo hung out on the state road.

In short, Sam was the 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 we've seen occur 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.

Gasoline Price Outlook

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. "[Company name withheld] 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 had a difficult enough time competing as it was. This time around, [the Big Oil company] made it impossible to compete by effectively reducing his margins to near 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 of heavyweight that controls the process from the oilfields, through the refineries and distributors, all the way down to setting the effective price at retail outlets. This even affects the outlets that the Big Oil 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 that are owned by, or leased from, the major).

The Oil Major makes far more money controlling area-wide access to product 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 Sam to leave the business, my friend has nowhere to go.

The End of "Real" Competition

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.

I'm not naïve - 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: My gasoline price outlook calls for higher prices. 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?

[Editor's Note: It's called the "Energy Game," and it's already begun.

Trust us when we tell you that the outcome of this game will determine your wealth, the wealth of your family, and the wealth of your children - for many years to come.

You're already experiencing some of the game each time you visit your favorite local fill-up spot. And with the way that gasoline prices have soared in recent weeks, the game is right now probably causing you some financial pain.

But here's the thing: If you understand the real rules of this game, you could tip the odds in your favor, and change that pain into pleasure ... a pleasure driven by the windfall profits that will be use for the taking.

Sound like a reach? Not really. You see, Dr. Kent Moors isn't just a columnist for Money Morning and editor of the Energy Advantage. He's also one of the world's top oil and energy consultants - a man who's kept on "speed dial" by the world's top oil companies and by some of the world's top oil-producing countries.

So Dr. Moors intimately understands the "rules" of the game. And he can tell you how to profit from that knowledge. To learn more, please click here.]
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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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