Business

Squeezed at the pump

Are the big oil companies driving out competition?

D’ARCY JENISH October 7 1996
Business

Squeezed at the pump

Are the big oil companies driving out competition?

D’ARCY JENISH October 7 1996

Squeezed at the pump

Are the big oil companies driving out competition?

Business

D’ARCY JENISH

For a man whose business has just taken a serious beating, David Mercer seems remarkably free of anger and bitterness. Or perhaps it is his accent—a mellifluous Maritime drawl—that makes him sound upbeat. Mercer,

41, is president of Northern Petroleum Ltd. in Sydney, N.S., a family-owned firm that supplies oil products to commercial clients.

Over the past eight years, Mercer acquired two retail gas stations from a major oil company. Through hard work and timely investments in new pumps, he more than doubled the two outlets’ annual sales. But during a 10-week price war this summer, his revenues plummeted by as much as 70 per cent, forcing him to close one of the stations on Sept. 6. His customers, Mercer says, simply drove down the road to Esso, Ultramar and Irving outlets because he could not match their prices, which were often below the wholesale prices charged by those companies at their refineries. “I asked them to sell to us at the retail price,” he said. “But they wouldn’t do it.”

Mercer’s contention that he is being forced out of the retail gaso-

line business by the major oil companies is echoed by many independent operators in the Atlantic provinces, Quebec and Ontario. And Maclean’s has learned that the federal Competition Bureau is examining those complaints as part of a criminal investigation into allegations of unfair trade practices. Over the past month, the bureau has summoned several independent dealers, including Mercer, to Ottawa to give sworn testimony at a closeddoor inquiry conducted by bureau staff. The inquiry stems in part from allegations last spring of price-fixing by the major oil companies, although more recently the focus has shifted to charges of so-called predatory pricing—selling goods at less than the wholesale cost with the aim of driving competitors out of business. “We take sworn statements because this is serious stuff if borne out,” said Donald Mercer (no relation to David Mercer), the bureau’s deputy director of criminal investigations. “The outcome could be nothing, or it could be referred to the justice department for a criminal prosecution.”

Idle independents now account for almost 24 per cent of gasoline sales across the country. In Manitoba, where they are strongest, independents hold almost 35 per cent of the market. ‘We’ve got a good

balance between majors and independents in the West,” said Stuart Murray, president of Winnipeg-based Domo Gasoline Corp. Ltd., which owns 73 service stations in the four western provinces. “You look at some of the things going on in the East and you shudder.” The eastern independents contend that the major national oil companies—Esso, Shell and Petro-Canada—and their regional counterparts, Ultramar Canada Inc. of Montreal and Irving Oil Ltd. of Saint John, N.B., have put pressure on them by tightening the spread between wholesale and retail prices. ‘We’re just trying to survive,” says Gilles Guindon, general manager of Mr. Gas Ltd., an Ottawa-based dealer that has closed 14 of its 73 Ontario and Quebec stations in the past two years.

Despite their willingness to testify, many independents question whether the Competition Bureau is capable of reining in the major oil companies. They point out that the last federal inquiry into the oil industry spanned 13 years, from 1973 to 1986, but left the status quo intact. As a result, the inde-

pendents are lobbying the Quebec, New Brunswick and Nova Scotia governments to prohibit oil companies from selling gasoline at less than the wholesale cost. Similar laws already exist in more than 20 U.S. states, including Florida and New Jersey. A trade association representing small Quebec gas retailers has even hired Washington lawyer Robert Bassman, an expert on the U.S. petroleum industry, to advise ■ them. “The laws are not [ J used very much, but the fact that they are thereo keeps everybody honest,”^ says Bassman.

The major oil companies, some of which have ¡5 sent representatives to testify at the Competitioni Bureau inquiry, flatly deny that they are attempt-£ ing to push out independents. Robert Paterson, al marketing department manager for Toronto-! based Imperial Oil Ltd., Esso’s parent company, ac* knowledges that the margins between refinery! and retail prices have narrowed, but says the rea-° son is that Esso and other major companies have reduced their retail operating costs by closing low-volume stations, laying off staff and revising fuel-delivery schedules. He rejects any suggestion that the majors have allowed prices at the pumps to fall below wholesale levels in order to hurt the independents.

Instead, Paterson says, the entire eastern Canadian gasoline industry has suffered because of a bitter price war. The battle, which briefly drove pump prices in Montreal to 19 cents a litre, began in earnest on June 18 when Ultramar announced its Value Plus program, promising to match any competitor’s price. Says Paterson: “These things have been going on for 20 years.”

Although the independents’ share of the market has not changed over the past five years, they contend that profits have been razor thin because the majors have reduced their own markups while effectively raising wholesale prices. In 1992, Imperial led the way in

abandoning the long-established industry practice of giving independents 45 days to pay for wholesale purchases. The terms of credit were cut to 10 days, even though other customers, such as trucking firms, were still allowed 30 days to pay. “That has been devastating,” said Allan MacEwen, who operates a chain of 75 gas stations from Maxville, Ont., 70 km east of Ottawa. “They did that for one reason: to weaken us.”

In some cases, the big companies have refused to renew supply agreements with independents who previously sold gas under the Esso, Shell and Petro-Canada brand names. Dealers who cannot meet the new sales-volume thresholds must find new sources or go out of business. Graham Conrad, head of the Retail Gasoline Dealers Association of Nova Scotia, says the thresholds have been a major factor behind the closure of 158 service stations in the province since 1991, reducing the total to 780.

Dozens of service stations have managed to stay afloat by entering supply agreements with independents. David Collins, vice-president of Wilson Fuel Co. Ltd. of Truro, N.S., said that his firm, which formerly sold heating fuel, has built a chain of 40 gas stations in Nova Scotia and New Brunswick by striking deals with operators that the majors had dumped. But price wars with Irving, Ultramar and PetroCanada have jeopardized the future of some of those locations. “For 28 of the first 38 weeks this year, the retail price has been below my wholesale buy price,” said Collins. “Irving took their price down to 39.3 cents a litre near some of our big sites and left it there.”

FUEL FOR A FIGHT

Major players in Canadas retail gasoline market (as of June, 1996)

Motorists, of course, love nothing better than a gas price war—which explains why the independents do not expect much public support. Still, they warn that consumers will face higher prices if the majors succeed in pushing them out of the market. As a sign of what might be in store, they point to Grand Falls, Nfld., a town of 16,000 that has 10 service stations—all owned by large oil companies since the last independent closed a year ago—and some of the most costly gas in the country.

This summer, regular unleaded sold in Grand Falls for 68.9 cents a litre, even though the price less than an hour away was as low as 48 cents. The wide discrepancy finally triggered a consumer revolt. A group of Grand Falls residents formed an organization called Newfoundlanders Against Gas Gouging and proceeded to boycott all but one local station, an Irving outlet chosen by drawing a name from a hat. Within days, the other stations cut their prices to 63.2 cents a litre. ‘The oil companies have an obligation to give us a fair price in all of our towns,” said organizer James Courtney.

The major oil companies respond that in any market prices occasionally rise too high or fall too far. They insist, however, that even as a group they are not powerful enough to control the market. The independents are equally adamant that the big oil companies are in control. ‘We’re being squeezed out like toothpaste in a tube,” said Collins, who has been invited to appear before the Competition Bureau inquiry. “If you want to know what happens when you don’t have competition from the independents, say hello to 69 cents a litre.” That may be conjecture, but one thing is certain: the war of words between independent gas dealers and the majors in Eastern Canada has become as ferocious as a price war at the pumps. □