- The Washington Times - Thursday, June 3, 2004

Washington-area drivers are paying on average $2.05 for a gallon of gasoline, but pump prices can run up to 15 cents higher if drivers head to the next county or neighborhood.

Many reasons exist for the discrepancy, but one of the major culprits is “zone pricing,” a legitimate but complicated practice that oil companies use when creating contracts with gas stations.

Oil companies and gas distributors determine wholesale prices for stations based on zones they create in each state. The zones can be as large as an entire county or as small as one gas station, but they will not disclose where the zones are or how they determine them.

Essentially, the oil companies examine how much competition is in the area and then estimate the price motorists are willing to pay, said Andrew Kleit, a Pennsylvania State University energy and environmental economics professor.

In a bid to rein in high oil prices, the Organization of Petroleum Exporting Countries yesterday said it would raise its oil-production cap by 2 million barrels a day next month and an additional 500,000 barrels a day in August if necessary.

But industry analysts said the increase was unlikely to lead to cheaper gasoline in the United States due to refinery constraints and other production bottlenecks, and would have only a modest effect on crude prices.

Democratic attorneys general from eight states have asked the Bush administration to investigate if the oil and gas industries are colluding to drive up the cost of gas using practices such as zone pricing.

Previous Federal Trade Commission inquiries into gasoline pricing during price peaks have found no such behavior.

Several states have tried to ban zone pricing in recent years with little success. Connecticut, New York and Maryland have introduced legislation outlawing the practice but have not been successful, according to the National Conference of State Legislatures.

Major oil companies like ExxonMobil Corp. and the Royal Dutch/Shell Group are more likely to lower their prices for stations in competitive situations such as those in areas with several independent gas retailers, such as a Sheetz or Wal-Mart, Mr. Kleit said.

Stations in areas with little competition, such as a station next to a major highway, are usually charged higher gas prices, he said.

“The oil companies are simply responding to the markets,” he said.

For years, consumer groups have called the practice price discrimination. Oil companies “have found a way to squeeze the last couple of pennies out of the consumers,” said Mark Cooper, research director for the Consumer Federation of America.

Motorist club AAA Mid-Atlantic is advising summer travelers to fill up outside of the Washington area to shave a few dollars off because the Washington market is more expensive than surrounding areas.

For example, a gallon of regular unleaded cost $2.15 yesterday at the Davis Exxon station on 14th Street in Northwest, but an Exxon station on Seton Square in Woodbridge, Va., charged $1.95.

Montgomery County stations tend to have higher prices than ones in Prince George’s County because the county has higher-income customers and higher real estate values, said Paul Fiore, executive vice president for a Bowie association that represents gas-station owners.

But station owners generally earn only about 5 cents to 8 cents of a $2 bill, said Mr. Fiore, with the Service Station Dealers of America and Allied Trades.

Gas stations operating under well-known brands like Amoco or Citgo may seem more profitable to consumers than they really are because the pricing method understates how much they pay their suppliers for the gas, said Bob van der Valk, a gas-pricing analyst and bulk-fuels manager at Cosby Oil Co., a Santa Fe Spring, Calif., gas distributor.

About 90 percent of retail gasoline is sold through the zone-pricing system, Mr. van der Valk said.

Station operators are free to set their own prices, even lowering them to beat the competition, but many will not stay in business if they can’t cover the cost from the distributors, Mr. Fiore said.

“Now, as gas prices keep skyrocketing, [zone pricing] isn’t as much of an issue,” but consumers will notice bigger price differences once prices stabilize and begin to drop, he said.

Oil industry groups say zone pricing is necessary to keep prices from rising further.

Several oil companies, including ExxonMobil and ChevronTexaco Corp., would not talk about their zone-pricing techniques and referred all questions to the American Petroleum Institute, an industry trade group. The organization would not talk about the method and referred questions to Mr. Kleit, who has written several reports on the issue.

“Zone pricing really allows gas companies to compete with independent retailers in very aggressive markets,” Mr. Kleit said.

If the method were outlawed, Mr. Kleit said major oil companies would be required to offer uniform pricing to all branded stations. This would lower prices for some gas stations, but raise them for others.

The result would be some stations could not afford the price change, forcing their closure and leaving the market with less competition, Mr. Kleit said.

Station owners in aggressive markets would not be able to cover their costs, he said.

While oil industry representatives say zone pricing is vital to keeping down gas prices, they acknowledge that the method can be used to scam gas-station owners and consumers. One way is for oil companies to tacitly agree to keep prices artificially high, Mr. Kleit said.

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