The California Independent Oil Marketers’ Association (CIOMA)
Comments to the Federal Trade Commission, August 2, 2001
The California Independent Oil Marketers’ Association (CIOMA) appreciates the opportunity to present comments to the Federal Trade Commission regarding the conditions of the petroleum fuels market. Briefly stated, the volatile conditions of the California fuels market and the significant regulatory expenses encountered in providing wholesale and retail fuels have put the independent fuel marketer in a very precarious position. Marketers, also known as "jobbers", exist on the price margin of products they sell or deliver. In situations driven by unpredictable and steep price swings, the ability to accurately plan a business is greatly complicated, as is the ability to make a sustainable profit. And, when facing ever-increasing costs of doing business, it is particularly difficult to make plans for significant capital expenditures. These are the market conditions that currently exist.
The independent oil marketer class of trade is a vital element in providing consumers with choice and competition for petroleum and other products. They serve agriculture, local governments, school districts, emergency services, construction, heavy and light industry, hospitals, as well as retail outlets. This is a critical time for CIOMA members. The legislative and regulatory decisions made in the near future will determine if California retains a vigorous independent petroleum market sector, preserving the competition they bring to the California fuels market and the service they provide to many critical elements of the California economy.
Fuel Price and Supply – The travails of the West Coast market are well documented. Due to its isolation, resulting from both physical detachment and fuel specification conditions, the market must rely on its own refining and transportation infrastructure to meet ever-increasing demand. As with the rest of the US, no significant additions to refining capacity have occurred recently. These circumstances create a tight market that fluctuates quickly and strongly if the right balance between supply and demand is not maintained. Here are some CIOMA observations regarding fuel price and supply:
CIOMA does not generally support market-intrusion legislation such as price control, subsidies, or other dictates interfering with the competitive forces at work in the marketplace.
CIOMA is very concerned about the closed nature of fuel supply in California. Some actions we have advocated in the past include:
Temporary elimination of the state portion of the fuels sales tax when state prices significantly exceed federal averages, or wholesale prices increase significantly over a short period of time.
Broaden the authority of the Energy Commission to declare a fuel emergency and allow temporary sales of non CARB-spec fuels.
Provide fast-track regulatory programs for increasing refinery capacity or permitting of new refineries.
Provide tax and other incentives to refiners, especially small independent refiners, so that they are able to upgrade in meeting new fuel specifications.
Insure that state and federal fuel specifications are completely equivalent in the future so that out-of-state supplies can be marketed in California without bias.
Mergers and Acquisitions – CIOMA is concerned that the continuing compression of major oil companies will create concentration of ownership where insufficient competitive forces will exist to assure a robust market. In very general terms, the following are CIOMA discussion points on this issue:
When divestiture of assets is required as part of a merger or acquisition, assets should be divested to companies not currently in the California market, and should go to companies who have resources sufficient to increase volume of products for sale in the state.
When brand changes occur as a result of mergers, dealers and marketers of the purchased-company brand should be protected so that they do not lose value invested and built up in their stations as they change brands.
Wholesalers should have protections so that they may pursue alternative supplies, without penalty, if new contracts change their previous supply agreements.
For CIOMA members, unbranded supply is critical. As mergers and acquisitions occur, the State should become involved in the approval process to assist in assuring that no reduction in unbranded supply occurs, and if possible leverage increased production of unbranded fuel supplies.
Unbranded Fuels - As independent fuel marketers, it is critical that a stable and affordable supply of ‘unbranded" fuels be available. Unbranded supply is fuel that does not carry a specific brand designation (i.e. Chevron, Arco, Mobil, Unocal, etc.) Marketers may develop their own brand presence (Rotten Robbies, New West and USA are some of the more common independent brands) or they may supply "mom and pop" unbranded service stations. More importantly, unbranded fuels are the life-blood of small-volume bulk consumers such as school districts, police and fire protection agencies, emergency services, local and state government, agriculture, hospitals, construction and industry. These consumers are very price sensitive and cannot afford the price premium attached to branded supply.
Unbranded supply has become an increasingly important issue. When fuel supplies become tight – an increasingly common condition - unbranded supply is the first to feel the effects. This is because the major oil companies provide 98% of fuels in the state, and those companies make sure that their branded/owner-operated stations get first priority. When this occurs, unbranded supplies may be physically reduced by limiting supply at pick-up points (called "racks"), or through price. When wholesale price of unbranded fuels exceeds wholesale price of branded supplies a condition called "inversion" transpires. Several times over the last few years the wholesale price of unbranded fuel was HIGHER than the street retail (posted station prices) of branded, direct-delivered fuel. The duration and intensity of these inversions have become more severe.
Unbranded fuel is typically the "price leader" in low cost fuels. If the supply of unbranded fuel decreases, it will have a negative, upward effect on state fuel prices. Lack of supply also depletes fuels critical to the survival of the independent oil marketer, and to their customer base - the school districts, emergency services, local and state government, agriculture, hospitals, construction and industrial consumers. Another negative consequence is that customers are impacted by the wild gyrations of the fuels market and have to make adjustments in their supply budgets. A school district, for example, has an annual allocation for bus fuel. If prices increase significantly, choices must be made in continuing all routes, or taking money from other programs to make up the deficit. The worst-case scenario is that supplies will become unavailable.
CIOMA is actively engaged in the issues surrounding unbranded supply:
CIOMA sponsored a measure that requires the California Energy Commission to track supply volumes and prices of unbranded fuels. It also allows CEC to monitor import and export of fuels into and out of California.
As noted earlier, CIOMA is concerned that the mergers and acquisitions occurring among the major oil companies is creating a "locked" market where fewer and fewer major oil companies are participating. We believe the Federal Trade Commission and the state Attorney General should closely evaluate proposed mergers/acquisitions with special attention on how combining will affect unbranded supply. Wherever possible, these agencies should promote and/or require conditions that will lead to increased production of unbranded supply.
CIOMA will participate in the evaluation of supply reserves. There may be market-driven ideas that hold merit in assuring adequate supplies through a set-aside program for unbranded fuels.
We appreciate the opportunity to educate the Federal Trade Commission regarding the views and concerns of the California independent fuel marketer.