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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  1. Trey Gilmore | March 23, 2011

    I believe this also happened when Walmart displaced the local grocery stores. Trying to do the same thing less efficiently than the competition usually does not work out. Relying on the competition for survival usually does not work out. Capitalism is competitive. Do it different, better, or more efficiently or get out of the way. Best of luck to your friend.

  2. J. Dent | March 23, 2011

    What a situation. And this is "free enterprise"?

  3. jack cukjati | March 23, 2011

    I worked my way through college owning and operating a service station. I had 17 employees and I was able to open it up on a small investment. I had the ability to set my own prices and operate as I saw fit. The "Big Boys" are not for free enterprise nor are they for the small guy, selfish and overbearing. We need to break up the large (used to be multi national) now foreign nationals here is the US? OUr whole system is broke folks.

  4. Bill Scheper | March 23, 2011

    Greed, it sounds is the game.
    Not honesty towards people.
    Where is our good old America going.

  5. George | March 23, 2011

    Well, Obama did say that he wanted energy prices to soar. For what reason? Who the heck knows anymore?? Was it so that it would collapse our economy and make America a third world country because somebody thinks we're rich and we should spread our wealth around?? Was it for our benefit to make us use "green" technology? Who can afford "green"? Not us regular folk! The author was right when he stated that the competition has declined. I think simply because the federal government is regulating the industry out of business. The only problem with that, there is no affordable alternative to go to.. none that doesn't have a federal government hand in anyway.. Their solution is to tax carbon dioxide, which is a building block of life, instead of giving us real solutions. I can tell you this, once gas goes to $4+ a gallon, this consumer isn't going to be buying anything other than necessities and even then, it will be minimal at that simply because inflation is taking its toll on food and necessities.. I have a feeling that a lot of us will be foraging for food in the woods before its over-with..

  6. Jeff Pluim | March 23, 2011

    I recently received an mail that I forwarded to most people on my email contact list. The email was a type of boycott request, of the major oil companies. This was not like any other one that I had seen. It did not ask that I boycott the gasoline station for a day or two. It asked that I boycott ALL of the major oil companies and use only the small indepentent service stations for my gasoline. And continue to do so until the majors reduced their gasoline price. What a good idea!! I wonder if the major oil companies got drift of this building boycott and decided to squeeze out the small operators so that we would only have the majors to deal with?

  7. Ted G Musgrove | March 23, 2011

    I'm sorry to see this go on in America. Course, if we would take down some of the taxes on gasoline pumps, we would have less per gallon, but then our taxes somewhere else would go up. I live in a small town, and our only grocery store charges twice the amout, we can get from a store about 20 miles away. If we want to eat, we have to go farther to buy, to get more for the less money. We have three gas stations, and they are owned by three larger dealers. But, the people seem to come and go. So, how does a person know one person for years, and not miss them when they go. We have an eatery, just across from our high school, and now it's closed, because someone isn't able to run it at this time. Plus, the price for the building is far beyound what this town would call it's worth. It's strange, if it's my stuff to sell, it's junk, and when it's someone else selling it, it's worth a Kings ransom. Really strange to me.
    Thanks for your time.

  8. mILT Browning | March 23, 2011

    Oh shit

  9. Sam | March 23, 2011

    Unfortunately, it's not only in the fuel market that the "little guy" is getting shoved out. On many online sales sites, such as Overstock, Amazon, and eBay, only the "big boys," who've shoved their way in, prosper. Don't tell me about "competition," not when these sites raise their fees so high that they "little guy" can't compete, that he winds up losing money on every sale. As with banks and gas, it's the Age of Greed, thanks to this administration. The "little guy" is shoved out of the game, and is forced to work for a "big boy," and oh, by the way, forced into a union as well.

  10. Jeff | March 23, 2011

    sounds like Sam wasn't the best businessman around, or maybe simply decided there wasn't enough money in a service station. Stations have been operating under the same conditions that made Sam throw in the towel, for decades. Most stations don't really make any money from the gasoline. That's why they all label themselves as "convenience stores" now.

  11. Pat | March 23, 2011

    I agree with George. My opinion is that Obama wants energy prices to soar because he intends to engineer the collapse of the economy. He uses the instrumentalities of government to implement his war on this country. His actions seem to be the actions of an enemy. His adminstration forbids drilling for oil in the Gulf of Mexico by U.S. companies, yet he gives two billion dollars to Brazil to enhance their already sophisticated deep-water drilling capabilities. He seeks to use "green" propaganda to implement broad spectrum regulation of nearly every industry in this country, the predictable result of which is our inability to compete with the rest of the industrial world. He and his ilk have loaded our government with so much debt that we have to borrow to the tune of 4 billion dollars a day just to keep the lights on. He is constant in his denigration of all that has made this country unique in its tradition of ordered liberty, and continually makes a mockery of the Constitution. Of course, he's not the only one who has done that, he's just the most egregious. On every front, whether it's health care, welfare in its myriad manifestations, or in any and every area of social engineering, Obama and his fellow travellers apparently seek to reduce the U.S. population to a level of dependency that can only be characterized as full-spectrum dominance.

    Foraging for food? You'd better learn to grow your own if you don't want to end up standing in the chow line at a federal population management center…

  12. Walter | March 23, 2011

    I have owned a small restaurant for 9 years now in a small village in Australia. I lived in the USA on and off for 3 years and I looked carefully at small business there. I could see that it was difficult indeed to thrive as a sole proprietor. Well, now the conditions are tightening in Australia for small business. It is becoming increasingly costly to run a small business, through things like compulsory insurance, skyrocketing energy costs ( electricity will have increased by 72 to 75% from May 2010 to Nov 2011 !!!) and new legalislation requiring more licensing and other costs from small business.
    I cannot pass these costs on because everyone else is also experiencing rising costs for the phone, electricity and mortgage repayments, food costs ( up 100% in 5 years ).
    I am in Malaysia now and life costs about one sixth fo Australia. They have better & cheaper medical care, roads, education, food, public transport and, dare I say it, healthier, happier people!
    Luckily I do not have debt and I can see that this is the new reality. But I wonder where all that extra money is going.

  13. Mark | March 23, 2011

    Indepent Gas station people never got It. Back in the day they would fill your car, check your tire pressure, and your oil, and you never had to get out of your car, and if you had to pay an extra .25 cents a gallon no big deal, and you did not tip. If your car needed some work they could work on it there. The customer used to matter. Now they just sell gas, they did this to themselves. You need a pack of smokes they would go in and get it for you. Times have changed, however to them the customer doesn't matter, they did this to themselves. They should be able to justify what they are charging, even if it is more. I used to know the gas station man, now It a different person every few months. The indepdent just got it wrong, and is still wrong. Poor me oil company's put me out of business, no you screwed up.

  14. Charles | March 23, 2011

    and they shall not be able to buy or sell or do anything until they have received the mark of the beast..

    shaping up to be just as it was written..

    the feds have already made laws against growing your own food..people have already been fined for giving away food from the garden..

  15. jj | March 23, 2011

    This country has done little since the first oil shock in 1973.With Americans continuing buying SUV's and other low mileage cars/trucks and the addition of demand from richer Asians,we can expect this problem to get worse.Hopefully we move on to higher mileage cars and alternative energy.China is investing heavily in alternatives that should benefit everyone.

  16. ROCKINROBBY | March 23, 2011

    burpee has engineered seeds so you have to buy new ones every season the hybrid /electric/h2o powered vehicles pay no road use county state fed tax your utilities are powered by fossil fuel this increase will be passed on to you the retail food suppliers have decreased as the gas stations trucks bring almost all of your supplies this cost is now yours we are a military driven economy notice how the market responds???? hang in there you wanted changes as long as you have puppet on string it wont

  17. Chance | March 23, 2011

    what can i say? … Pat already said it best. I COMPLETELY AGREE.

  18. RS | March 23, 2011

    Can you say MONOPOLY?
    Here in WA state you can still find up to 10 cents difference in price between competing stations; a short time ago I was back in WI and never saw more than 1 cent difference. What a racket!

  19. Al Gardner | March 23, 2011

    Besides being a tale of the failure of anti-trust regulation and enforcement, as well as questionable price fixing, if there were any evidence of collusion between the "Big Five" that Dr. Moors alluded to,
    the attempt to blame the federal government for "regulating" small business out of exiztence is an absurdity. The whole principle of oligarchy is the vesting of the power to rule in a few over the many. That is exactly what this shows. And we lose again.

  20. Alan Gardner | March 23, 2011

    It all goes back to the extreme environmentists trying to shut down the country. It started in the Northwest with the spotted owl and the elimination of the timber industry. It has spread to mining, oil, gas, coal, grazing. Obama just loaned Brazil three billion to drill off shore in deep water at the same time closing off drilling here. They are forcing high paying jobs out of the country and making us pay big budks to buy products from foreign countries that we used to provide here. It devalues the dollar in the process.

  21. Ned | March 23, 2011

    Thank you Pat. You summed it up very well.

  22. paul | March 23, 2011

    I am involved in the business as part of "big oil".
    this story is full of baloney and devoid of facts.
    oil cos. only set the retail price at the few staions they run on salary–and that is very few and a declining number every day.

  23. George | March 23, 2011

    JJ, SUV's aren't the problem.. it's the upper management, aka: The federal government, that's putting the thumb screws on us.. they have gotten too big for their own good and seem to be driven by the unions.. Obama seems to be their puppet or something..

  24. Paul | March 23, 2011

    Charles you are soo soo right.

  25. Starline | March 23, 2011

    I thought this practice was common knowledge as it has been going on for years in Australia.Many independant operators are gone.
    It is the same for grocery shopping with our majors now selling fuel,alcohol and are trying to get chemists in there stores.They are now selling milk and are about to sell certain beer brands below cost to take market share from local stores and pubs under the guise of competition.
    The major licquor supplier has just cancelled their delivery as they believe it will damage their brand and other customers business.
    The issue is spineless policies from our government who favour big business.They have big budgets to lobby politicians for favourable policy and competition laws.

  26. LarryP | March 23, 2011

    The Fiat Panda SUV gets over 50mpg. Most European cars get higher fuel economy than anything the Detroit Big 3 produce and most are safer in a crash (of comparable size). Diesel fueled vehicles produced in the EU have lower/cleaner emissions (those produced in the past 5 years) – yet the land of 'Yankee Ingenuity' can't compete – why?

    Could it have something to do with patenting costs? Apply for a patent in the UK and the fee is around $200 (professional patent search included). In France the application fee is 'FREE'!

    Maybe it has something to do with Govt attitudes to 'Intellectul Property'. Did any of you know once someone applies for a (US) patent the USPTO counts down 18 months and then publishes that application for all to read – regardless of whether they've granted patent protection for it? How many inventions (originated in the USA) were snapped-up by foreign companies which actually have employees in Washington DC searching the USPTO records as soon they're published?

    As the designer of some innovations you're all using everyday – I was forced to give these designs to a major computer company (originally USA – now international) which manufactures only a few of its products in the USA. Most are produced in Mexico and countries which WERE behind the 'Iron Curtain' until 'The Wall' fell.

    Can't blame Obama for everything wrong.

    Both Bushes had a LOT to do with this mess. It was Bush Sr. who hired the SEC commissioner who actively inhibited state AGs when they were investigating fraudulent Limited Partnerships sold as 'secure investments' to the elderly here and abroad. BTW: This was at the same time Bush Jr. was shopping out his Texas Rangers LP to elderly retirees through Pru-Bache.

    Want to get REALLY mad at the people who ruined the American economy? Go to Amazon.com and buy 'Serpent on the Rock: Crime, Betrayal and the Terrible Secrets of Prudential Bache'.

    First it'll make you cry – then it'll make you angry.

    Don't get me wrong. I'm all for 'Free Enterprise' under a Capitalistic system but what'd been happening since the end of WW2 has been anything but 'Free' enterprise. With so many corporations having their hands in the hip pockets of politicians and political party bosses it's little wonder 'the little guy/gal' is driven out of business.

    The ONLY reason the USA enjoyed such rich times was all the other industrial nations were essentially bombed out of business during the war. Our Govt aided them back onto their feet (to beat Communism) only to find they could beat us at our own game. Trouble was – too many people in the USA bought into that "We're Number 1!" rah-rah cheerleading PR that they didn't bother to pay attention to the fact some of those people we beat in the war learned how to compete against us in sales and were willing to undersell us for smaller profits only to put us out of business. THEN they raised their prices when our firms couldn't compete.

    WHO's concentrating most of their sales efforts on large vehicles which use way too much fuel – which will soon be selling at $5/gal?

    Who's touting cup holders and other amenities while others are pushing higher fuel economy and safety?

    Hint: It's not the europeans or asians.

  27. Bob | March 23, 2011

    Sam was like many of us who, for any of several reasons, decide that we would like to be our own boss or think that perhaps we can control our own destiny. We sacrifice our and our families' savings to start a business and work unusually long hours with the notion that the sacrifice is worth it because we are "building a future" for us and our family. It is later that we learn that all of us operate within an invisible fence. Even if we can navigate our way through the mine field of government regulations and taxes, we can only be successful within the limits that serve a purpose and are tolerable to our customers and our suppliers. The amount of success we achieve with our customers will eventually become the envy of our suppliers and/or the money changers controlling our governments. Their mission is to find a way to get an ever increasing cut of our success. Sam's story is one that has been repeated many times and for many years as big oil either got what they wanted from their dealers or drove them out of business. Sam’s scenario is played out daily in different ways with different kinds of businesses in many industries. If you go to work on commission you are told that the initial sacrifice of working for so little will be offset by the fact that the only limit to the amount you can earn is your own initiative. However, once you become the unique individual who exceeds most others, the greed of whoever controls the percentage of your commission will find a way to change any promise, break any contract and/or make your life miserable. Oil is no different than any other resource in that the retail price is controlled more by big money and the alliance of governments with big money than by supply and demand. While it behooves us to conserve all resources, our planet is awash in energy and the monetary greed that follows any resource. Our major shortage is in common sense and decency and it might not be a good idea to hold your breath waiting for those things to happen.

  28. Bertil | March 24, 2011

    Good bye Western World and America, it was nice to know you.
    WE'better start welcoming back world dictatorships governents.

  29. ujay | March 24, 2011

    @jj
    China is investing heavily in nuclear power. The wind and solar energy is exported to Europe in order to profit from the massive subsidies, that the clients have to pay with their electricity bill.
    These stupid rules doubled prices and abolish free enterprise.

  30. Bill Anderson | March 24, 2011

    Americans would give their big yank-tanks the flick, then everybody would pay less for oil. Americans should be self-sufficient in energy, but they insist on using twice as much gasoline as everybody else. The solution is to tax it to pay for your deficit, folks. You would use less and the world price would go down. The cheaper price of oil in the world would lead to a "real" if temporary, recovery. As for Sam, sorry dude, he just can't compete with faster, stronger, better multi-nationals. His costs are higher, his profit lower. Time to sit on the porch and abuse long-haired passers-by.

  31. Bart Hall (Kansas, USA) | March 24, 2011

    Around here, most filling stations get their product from the same refinery, and that includes the "Bigs." Said refinery produces a highly generic product, and when the tanker from 'Mobron' pulls into the refinery they toss in the 'Mobron'-specific additive pack and fill the thing, whereupon it magically becomes a 'Mobron' product. Local indies get the same gas, which is perfectly good, just without the major-specific additives. If they want an additive pack from one of the majors they've been able to get it (at a slight premium due to lower volume), but the Terms of Agreement prevent them from using the major's name to promote the product.

    This past week I bought gas from one of the indies and paid $3.30 for it. Not a great price, but 10 to 15 cents below the majors and he was pumping a metric $#|+load of gas. It also helps that he promotes "NO ETHANOL" which people around here have come to hate, even though this is serious corn country.

  32. texmac | March 24, 2011

    They got rid of the small independents during the first oil shortage, No gas the Major stations got the gas the independents did not. The Majors have the refinerys and so they have the distribution. The days of a stand alone gas station are done gas brings them in you need somthing to sell to stay in bussness and not just gas.

    The no drilling rule in the Gulf drove the rigs out reduced the potental back log of produceable oil by two years and the oil companys will drive the gas price up point to the Gulf and say talk to Obama. Yep 5 dollar a Gallon is in site.

    Luckey I am in Brasil thats were the Gulf rigs went.

  33. William Patalon III | March 24, 2011

    Hi folks:

    We go through a pretty intense process each week, and again each day, in choosing what stories we want to report, write and post. Some stories are investigative in nature, and are intended to serve as exposes. Others are "how to" type pieces. Many are investment-research-type works.

    Everyone once in awhile, we'll pick a story or column just because, well, it's a great "story."

    That was the case with this "Sam the Service Station Man" column by Dr. Kent Moors. As noted, we first introduced you all to Sam in a column by Dr. Moors last summer — a column that also generated a great response.

    It goes without saying that we're very pleased with the quantity of the responses here. But even more, we're thrilled with the level of thought that you each put into your posts here. The Money Morning reader is a special breed — informed, smart, and free-thinking, but clearly also possessing a depth of sensitivity and empathy that is to be admired, and even lauded.

    It's a pleasure to put together this newsletter for such a great group of readers. Rest assured that we will continue to put forth our very best efforts to keep you informed, to uncover wrongdoing or reasons for caution and to point out investment opportunities that will keep our readers "ahead of the curve.

    Very respectfully yours;

    William Patalon III
    Executive Editor
    Money Morning

  34. Stan | March 24, 2011

    Not that long ago, Ben Bernake stated at a hearing that gas would still be
    a bargan at $6.00 per gal.
    Guess which way prices are headed.

  35. alowl | March 27, 2011

    I recall paying $4.10/gal with two oil guys in the White House. So clearly gov't regulation isn't the problem. Our refusal to change our ways is. As long as we to continue subsidising
    gas to the tune of at least $1.50 gal, nothing will change except the level of bit**ing. As long as we remain addicted to an energy source that we have little control of, things will only get worse.

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