Oil giants are tightening their grip on the California gas market, squeezing small retailers out of business—and charging you more at the pump.

Photo By Larry Dalton

Just off the freeway in North Sacramento, the various strata of the retail gasoline business are laid out along a busy road like the layers of a geological core sample.

Exit I-80 at Northgate Boulevard, head south, and the first gas station just past the sweeping curve of the offramp is a Shell station. For gas stations, this is prime, high-volume real estate. The bright yellow shape of the station’s clam-inspired logo beckons exiting motorists. Below that, the station is clean and neat with new-looking pumps ready to take your credit or ATM card. On a day in mid-March, when gas prices were at their peak, unleaded self-serve gas at this station was at $2.159.

A few blocks south, there are two more stations across the street from one another. On the same day, a Chevron with a high price posted on the curb sat nearly empty on one side of the street, but the Arco AM/PM station across the street was packed, nearly every pump dispensing fuel at about a dime a gallon less than at the Chevron. Arco, a cash- or ATM-card-only operation, is the only discounter among the major brands. Farther south, there is a 76 station and then, as the neighborhood starts to look just a little rougher, a Tesoro. It’s nearly a mile from the freeway and is the last recognizable gas logo on the boulevard.

After that, there are more stations, but they are all independents, the kind that sell cheap gas and don’t display corporate logos. The first one, on the left a few blocks past the Tesoro, is Northgate Liquor and Food. The two small islands under the canopy out front have old-style pumps without card readers. The station’s small mini-mart is a modest building with faded advertisements taped in the windows. The store sells the usual items: liquor, cigarettes, candy and snacks. But the sign out front on that mid-March day listed one of the lowest gas prices in town: $2.039.

Inside, a steady stream of customers walked in and slid crumpled bills across the counter for gas. Navjot Singh, who runs the station for his uncle, put the bills in the register and thanked everyone. Propped up in the corner behind him, within easy reach but hidden from view, was an old wooden baseball bat.

Running a small, independent gas station is a tough business, but during price spikes like the one that sent fuel prices to record highs all over California this year, it becomes all but impossible for independents to make money selling gas.

Tony Riar, Singh’s uncle, is one of the two co-owners of Northgate Liquor and Food. Every morning, he’s up around dawn and off to open the gas station. He drives that same stretch of Northgate Boulevard that’s lined by gas stations, and he checks the price at each station as he drives. The prices climbed at an incredible rate during the first months of the year.

After he gets to work, Riar calls his suppliers to find out who’s cheapest. But on this day, the price for regular unleaded had jumped by another 2 cents a gallon since the last time he’d ordered gas, a couple days earlier. So, he picked the least expensive one and placed an order for a tanker to replenish the supply in the tanks buried underneath the station. Then Singh walked out to the street, where the sign read $2.019 for regular, and raised it by 2 cents. Singh then entered the change in the computer that runs and monitors the pumps.

But, although Riar’s price had gone up by 2 cents, and he’d covered it by upping his own price 2 cents, he wasn’t making money. By selling gas for less than what he paid for it, Riar was losing 2 cents for every gallon his customers pumped into their tanks, about 2,000 gallons on an average day.

What happens to a few independent gas stations doesn’t usually concern anyone beyond the regulars who stop there. But increasingly, independents are being squeezed out of the California market. That’s significant because independents play an essential role in keeping retail prices down, by providing competition. Without independents, oil companies that own refineries and control retail stations have much less incentive to compete by keeping their own prices low. In a state that guzzles 40 million gallons a day, that’s something that could have serious implications for an economy that lives and dies by the gas flowing through its veins. For the most part, gas isn’t really something consumers have much of a choice about buying, and even if they go cold turkey, fuel is a commodity that, either directly or indirectly, is part of the price of almost every product and service.

For small gasoline retailers like Riar, taking a loss when prices spike is now part of doing business. As an independent, Riar can buy gas from whichever local supplier has the best price. Branded stations, on the other hand, pay fixed prices set by supply contracts signed with major refiners. But when supplies tighten, those branded stations have priority over wholesale dealers that sell to independents like Riar, and the increased demand drives up wholesale prices. It’s called an inversion. That kind of situation arises because refiners can produce more gas than the market needs, and the surplus is what usually goes to independents.

Branded stations make up about 70 percent of retail gas stations, according to a state estimate from 2000. Independent, unbranded stations and refinery-owned and -operated stations each make up about 15 percent.

Back in December, when gas prices were at relatively low levels, wholesale prices were at the lowest in a year. Riar could shop around and buy gas cheaper than the major-brand stations up the road. He could keep prices low and still make about 10 cents a gallon.

Part of the problem for independents is that California is an island, isolated from the supply networks that connect much of the rest of the country. Also, state clean-air laws mandate some of the cleanest burning gas in the world, and almost no out-of-state refineries are set up to produce it. On top of that, there are just 11 refineries in California, down from more than 30 in the mid-1980s, and those remaining refineries are in fewer hands. Five years ago, the world’s biggest oil companies started a wave of consolidation that left the world energy market in the hands of about a half-dozen major players. In one of the largest consolidations, two years ago, San Ramon-based Chevron swallowed up Texaco in a $45 billion merger.

The question of how much profit refiners make comes up every time gas prices spike, when politicians, helpless to respond to the complaints of outraged constituents, start calling for investigations into allegations that oil companies are gouging consumers by keeping supplies low, which increases prices. Governor Gray Davis did it in March, when he asked the state energy and utilities commissions to probe gas prices. So did Senator Barbara Boxer, who requested a federal inquiry.

At times like those, oil companies never want to talk about price spikes. They refer press calls to the Washington, D.C.-based American Petroleum Institute (API), the industry’s lobbying group. API’s standard response is that none of the price-gouging charges has ever stuck.

“We’ve had 25 requests by politicians to look into price gouging,” said API spokesman Bill Hickman. “And we were exonerated every time.”

And Chris Walker, a Sacramento lobbyist for an association of branded gas stations, said gouging allegations are a red herring. California’s refiners aren’t doing anything more than making money, he said, which gets easier as competition slackens. “It’s not a grand conspiracy.”

Though the state tracks oil-refiner margins (the difference between what a refinery pays for crude and how much it charges for gas), that number doesn’t show how much the refiner profited for each gallon of gas produced.

Nella Oil Chief Executive Officer Tom Dwelle, who oversees a small chain of independent stations under the Flyers brand name, has watched a lot of small stations go out of business.

Photo By Larry Dalton

The California Energy Commission breaks down the costs of a gallon of gas on its Web site. The figures break down how much goes to crude-oil costs, wholesaler costs and profits, refinery costs and profits, and taxes. The refiner cost-and-profit margin usually accounts for around 30 cents per gallon of gas sold at retail.

This year, according to state figures, refiner margins more than tripled in less than three months. On January 1, unbranded gas averaged $1.58 at the pump, with refiner margins of 21 cents per gallon. When prices peaked 10 weeks later, the same gallon of gas went for $2.14, but the refiner margin had shot up to 76 cents per gallon.

It may sound like refiners are holding consumers hostage, but state investigations have never found anything resembling a smoking gun. The most comprehensive study of the California market was issued by state Attorney General Bill Lockyer in 2000. The report, produced by a task force as part of an investigation that continues today, found no wrongdoing but also concluded that there’s just not much competition in the state anymore. The main reasons are that refining capacity is tight and that the refiners who produce the state’s gas also have a lot of the retail outlets locked up.

“Although similarly structured as other markets, the gasoline industry in California is more concentrated and vertically integrated than gasoline industries in other key refining areas of the United States,” the report concluded. “In California in 1990, the refinery market share of the largest seven branded refiners was less than 80 percent. Today, just six refiners control 92 percent of the state’s gasoline-refining capacity. These same six refiners account for more than 90 percent of the gasoline consumed in the state.”

With a business partner, Riar bought his gas station in 1989 after giving up a Silicon Valley tech job to move to Sacramento. He was tired of living in the Bay Area, and Sacramento put him closer to the places where he hunts bear and deer. The switch meant hard work: Riar’s workdays can stretch up to 10 or 12 hours, starting at 6 a.m. when he opens the gas station. Running the station himself and hiring family members to help is a way to keep costs down. “We are surviving because we don’t count our hours,” he said one morning. A lot of independents—the ones that are left, anyway—do the same, he said.

Five years ago, environmental laws mandated new underground storage tanks for all gas stations. Riar kept the mini-mart part of the gas station open while the old tanks were dug up and replaced. The work alone cost $165,000, but Riar weathered the disruption—something a lot of independents couldn’t do.

Mini-market items like the food and drinks sold inside can be a saving grace because they usually have a much bigger margin than gas does (a soda, for example, might cost pennies but sell for dollars). But that’s complicated by the fact that high gas prices mean customers have less money for other items, so they buy fewer sodas and candy bars. The challenge is to keep gas prices low enough to keep a steady stream of customers coming in the door.

“We’re selling gas well because we’re independent, but we’re getting no profit,” he said. “We have to sell the gas as cheaply as we can to keep going.”

Adding insult to injury, Singh said, customers complained about the high prices and blamed him. The irony, of course, is that as he said this, the profits were being taken far up the supply stream, before one drop of gas went out the refinery gate.

Since the region’s first refinery went up a century ago, Northern California has been getting almost all of its gas from refineries clustered around the Carquinez Strait, in places like Martinez, Rodeo and Benicia. Today, there are five major refineries in the area, all taking oil from ships and pipelines and then pumping it through tubes inside a high-pressure furnace that breaks down crude oil’s hydrocarbons into different compounds.

These refineries pump the finished fuel products through a network of underground pipelines to regional distribution centers. Sacramento’s fuel comes to two terminals, one on Bradshaw Road and the other where Broadway meets the Sacramento River. At these distribution centers, or racks, gas is stored in tanks and then trucked to gas stations.

Most of the gas at the racks is already spoken for by branded stations that have supply contracts with refiners, but there’s also surplus gas. The leftovers are what wholesalers buy and then sell to independent stations.

The system works until a hiccup—from minor things like bad mixtures of gas to big things like explosions—disrupts refinery output. When there’s a shortfall, prices jump, and independent stations, which don’t have supply contracts, end up paying much higher prices. If there’s a severe shortage, independents also are the first to be refused.

That decline of independent retailers eliminates a key downward force on prices, said Severin Borenstein, director of the University of California Energy Institute at the University of California, Berkeley. “It’s potentially quite serious because independents seem to be the real competitive force in retail. They’re the ones that keep some check on the branded prices.”

With just a handful of refiners left, Borenstein said, “the market has gotten pretty tight over the last few years. They’re not running with a lot of excess capacity, so it has gotten a lot harder for the no-brand retailers to buy gasoline at the rack.”

Will Woods, executive director of the Laguna Hills-based Automotive Trade Organizations of California, a group made up mostly of branded dealers, pinpoints Arco’s 1997 acquisition of independent gas retailer Thrifty as the moment things started to get really hard for independent, unbranded stations. Thrifty was the last major supplier to independent retailers, and its disappearance eliminated a force that brought all gas prices down.

“When Arco and Thrifty merged, the trucks were lined up at the gate, and Arco was saying, ‘Sorry. We don’t have anything for you. We need it all for Arco.’ In that time period, all but the 10 percent that are left have either gone out of business or branded up to become a branded dealer.”

That made it even harder on gas stations that remained independent. Today, Woods said, unbranded independents make up about 10 percent of the state’s gas stations, which helps keep California gas prices among the highest in the country. In Texas, where gas is cheap, half of all stations are independent.

Tom Dwelle, chief executive officer of Auburn-based Nella Oil, is on the opposite end of the spectrum of independent retailers. His company owns 70 gas stations in California. Some stations are the company’s own brand, Flyers, and others have contracts with major oil companies to sell gas at branded stations. Nella is also a fuel wholesaler, running 30 tanker trucks 24 hours a day.

Dwelle grew up south of Fresno, in Hanford, where his grandfather, Walter Allen, founded Beacon Oil in 1931. In 1979, he and his three brothers formed a sister company called Nella, starting with one gas station (the name “Nella” is “Allen” spelled backward). Beacon was later snapped up by Canadian oil giant Ultramar. (In an example of how mergers and acquisitions have brought some industry assets full circle, some of the 23 gas stations that Nella recently bought from Tesoro last year were Beacon stations first opened by Walter Allen.)

Tony Riar, who owns a small, independent gas station on Northgate Boulevard, lost money on every gallon he sold when prices spiked in March.<br><br>

Photo By Larry Dalton

Nella does millions of dollars worth of business every year, but it’s still a relatively small company, and it got hit hard during the price spikes.

When prices leap quickly, Dwelle said, he can’t keep up by charging his customers more. “We’re at their mercy,” he said. “I can’t go up and raise the street [price] up immediately by 5 cents, because Arco will eat my lunch.”

In mid-March, Dwelle said he and a lot of other independent wholesalers and retailers were caught in the same bind, unable to cover high costs. That same trend, throughout the years, has been the factor that pushed many independents out of business when they couldn’t keep up.

“There aren’t any more moms and pops around” anymore, Dwelle said.

Dwelle knows firsthand about independents going under because his company bought some of the failed stations. In a hangar next to his office just off the tarmac at Auburn Municipal Airport, the Dwelle brothers keep some of the relics of the business, from old-fashioned gas pumps with clear glass tanks on top to old signs advertising long-forgotten brand names such as Big Dummy Gas, a station the Dwelles acquired more than two decades ago after the gas shortages of the late 1970s.

International supply disruptions, such as the labor unrest that shuttered Venezuela’s state-run oil company this year, can cause some headaches, Dwelle said, but most problems are due to the tight supply in California.

When prices shot up, Dwelle said, the 10 to 12 cent margin he needed to make money selling gas vanished, leaving his stations to sell at a loss, just 5 cents profit per gallon. “We need 7 or 8 cents’ margin to be profitable. That’s the cost of opening the doors.”

At the same time as factors like that force stations to close their doors every year, the consolidation among big refiners means there are fewer refineries competing with one another, so prices increase.

“In the old days, we had a lot of refiners, but 23 of them in California have closed in the last 15 years,” Dwelle said. “I had great fun playing the suppliers off of each other, but we can’t do that anymore because they’re all joining forces.”

Dwelle said his company was getting squeezed by high prices, but it wasn’t something that would put him out of business. But it’s different for some of the small stations his company supplies, some of which are coming close to closing—especially after having to pay for pricey underground tank upgrades a few years ago. Dwelle wouldn’t name names, but he said he sees the signs when stations sell their trucks, pay employees poorly, don’t provide benefits and don’t invest in upgrades.

“If everything works right, then we can make a little profit. And in the end, fortunately, most years, it’s more up than down. It’s never really good, but you know, we’re not dead yet.”

With this year’s price spikes, relief came not long after prices peaked. Crude oil, which had hit a 12-year high of $40 a barrel in February, dropped by $12 a barrel on the international market at the onset of the war in Iraq. By early April, wholesale gas prices in California had plummeted 40 cents from the highs they’d hit two weeks earlier.

Retail prices, however, dropped by only a couple cents. To make up for high wholesale prices, stations hike prices quickly and drop them very slowly.

On April 2, California Energy Commission (CEC) Chairman Bill Keese briefed reporters at the Capitol about the gas-price report requested by the governor. But the answer to the question everyone wanted to know was “no.” Just like all the other studies, this one found no smoking gun proving that refiners had done anything wrong. Instead, the report confirmed what oil companies have been saying all along: It’s the market at work. As Lockyer had reported three years earlier, Keese also noted that a small group of refiners control 92 percent of the market. Keese also noted that consumption in California is increasing by 3 percent a year. The resulting increase in demand helps push up gas prices.

“We seek to reduce consumption and reduce exposure to the spot market,” Keese said.

But in addressing the reasons for the price spikes, the CEC staff report also included a couple lines saying, in effect, that nobody knows how much refiners are pocketing when prices spike because there’s no way to separate costs and profits. It was frustrating for oil watchdogs when refiner margins, usually about 30 cents, ranged from 19 cents to 76 cents.

Though there’s no evidence that refiners are gouging consumers, Keese is predicting that prices will continue to be erratic for years. To fix that, the CEC is considering another strategy. Because tight supplies are the primary reason for the price spikes, one CEC proposal would create a gasoline reserve to be tapped when refiners get behind. The reserve originally was recommended by the attorney general’s report in 2000 but was never pursued.

At Riar’s station on Northgate, business has been up since the mid-March price spikes. On a weekday morning in the first week in April, Riar was the only one working at the store, and he was trying to keep up with a nonstop stream of customers.

The sign posted on the street was $1.979 for regular unleaded. Between customers, Riar said his delivery the day before had been at $1.79 and that he’d been back in the black since the week before.

Still, as his prices came down, so did the price at the Arco up the street. Even though Riar’s lower wholesale prices made it possible to make a profit, it was still hard to compete. “We can’t. We can’t. There’s no way. We try our best, but Arco’s a big company. The price [our suppliers] are giving us is a good price, so sometimes we can beat Arco, but Arco usually beats us.”

Riar greeted customers with a “How ya doin’, boss?” He knows most of them by face, if not name. “You’re late today,” he said to one. “Are you working at that new store?” he asked another. Every transaction was punctuated by the constant electronic ding-dong of the door sensor. Customers came and went, buying a pack of menthols, a bottle of malt liquor, lottery tickets and, of course, a lot of gasoline, which is invariably ordered the same way, by dollar value and pump number: “5 on five” and “10 on two.”

Though it’s a hard business, Riar said he wouldn’t consider branding up with one of the majors—not that they’d be interested in a small station in an out-of-the-way area anyway.

The picture doesn’t look rosy for independent gas retailers like Riar, and by extension their impact on prices, but consumers ultimately have more control over gas prices and supplies than they think. The answer, according to the CEC, is simpler than it seems: Shop around and don’t guzzle so much gas.