Oil Watchdog

Oil Watchdog presents the hot fuel issue as one hoisted on the public by  Big Oil. Without defining Big Oil, we have to assume she means large refiners and integrateds, as opposed to retailers. Let's examine the facts in this case, instead of the anecdotes.

The claim is that an annual $400,000,000 in excess revenue is generated dishonestly in California. As Oil Watchdog is clearly biased in this case (they are after all paid to criticize the oil industry), we can safely assume that this figure is probably at the very highest end of the impact spectrum. But let's take it anyway, and break the figure down and see, to a reasonable approximation, just who is getting what from hot fuel. By the way, I'll state here that the more accurately fuel can be dispensed, the better for consumers. But the real issue is, not what is the best technical solution, but whether consumers would benefit from ATC. Oil Watchdog sweeps the latter point under the rug and presents ATC purely as a morality play.

The simple analysis goes as follows:

$400,000,000: Oil Watchdog's claimed ripoff. This is in the form of revenue to the retailers.

10% profit margin: we are here mixing refiners and integrateds, so it's not a bad approximation. But we'll reach the same conclusion below with any reasonable range of profitability assumptions.

$40,000,000: hot fuel profit to the industry.

Who is getting this? We know it only applies to the retail level (as Dugan has reported herself) since refiners sell their fuels corrected for temperature.
 
Here are the market shares of California refiners, as reported by the state of California:

Company        CA Market Share, Gasoline
BP                   19%
Chevron           19%
Valero              13%
ConocoPhillips   12%
Tesoro              11%
Shell                10%
ExxonMobil        6%
Big West            2%
Kern                  1%
New West           1%
Petro-Diamond    1%
Tower Energy      1%
IPC                    1%
Others               3%

In terms of industry concentration, this market does not look particularly concentrated when compared to other critical industries, such as automobiles, computers, or tires. So the case for conspiracy is weak on the basis of market share alone. At the level of the state of California, the Herfindahl Index for refining would be about 1300, well below the 1800 that might start getting attention at the Department of Justice. In fact, the DOJ considers industries in the range of 1000 to 1800 as being only "moderately concentrated."

We now want to take the $40,000,000 hot fuel profit derived above, and allocate it to the state's refiners. But first, as Dugan knows and has reported, we know that Big Oil has largely exited the retail sales business. In fact, she has quoted the widely published fact that about 97% of retail sales go to retailers, and not to Big Oil. So we need to allocate 3% of the $40,000,000, or $1,200,000, to Big Oil refiners by market share. When we do that we get the table below (here showing Big Oil shares).

Company        Share of Hot Fuel Profit
BP                              $228,000
Chevron                      $228,000
ConocoPhillips              $144,000
Shell                           $120,000
ExxonMobil                    $72,000
Combined Retailers  $38,800,000

Clearly, the benefit to Big Oil, by Dugan's own figures, of hot fuel in California would not even cover the cost of a lawyer for each company. In short, Big Oil could really care less about hot fuel in terms of impact to the bottom line. ExxonMobil's hot fuel take in California represented about 0.00018% of its total profit. It probably spends many times that on landscaping or office water coolers.

And just as clearly, we see that the retailers should have a vested interest in the outcome. But when you consider that there are about 12,000 gas stations in California, you find that

$38,800,000/12,000 = about $3200 annual hot fuel profit per gas station.

In other words, the average California station doesn't appear to be getting a huge jolt from this either. I think we can safely assume that this is not a profit grab by Big Oil, or even the retailers: the retailer opposition is probably based more on avoidance of ATC costs and maintenance.

But the really interesting point to be made here is that on the one hand Oil Watchdog charges this group of retailers with fraud, but on the other hand claims that the retailers will now absorb the cost of the equipment and maintenance, to the benefit of consumers. What if Oil Watchdog is wrong, and the consumers end up behind in the long run? This strong possibility is essentially ignored. For reference, the average consumer, if he drives 15,000 miles per year and gets 20 mpg, is paying a little under $19 per year on hot fuel (based on the $400,000,000 divided by gallons sold in California, or 2.6 cents per gallon). What if the retailers pass along an average of 4 cents per gallon? Why not? Aren't they conspiring to rip us off now anyway? After all, each retailer will know that his competitors are facing the same new expense. The whole episode would probably be a futile exercise in money laundering in which no one benefits. This is one of the reasons why the American Trucking Associations, the nation's spokesman for the trucking industry, opposes ATC. Any charge that the ATA has a vested interest in higher fuel prices is not credible.

If the potential buyer of Judy Dugan's $5000 used car finds a defect in the engine (perhaps a microscopic hole in a piston) that might cost him 8 extra gallons of gas per year (near our $19 hot fuel cost), and Dugan learns it will cost $500 to replace the piston, will it be a good thing for the buyer if she does that and charges him $5500? Dugan is, after all, selling a car which she knows has a hidden foot on the gas pedal. Or would she just negotiate a new price and let the market make the correction? Isn't that in fact what retailers are doing? As the market shares above show, and as recent steeply falling gasoline prices have proven, the industry is competitive. Unless they conspire, it would seem that no one retailer could make incremental profit off hot fuel as long as a competitor somewhere was willing to cut into that profit to gain market share. The market will equilibrate to a rate of return acceptable to competing retailers. Introduce a retail cost perturbation into the system, as in ATC, and prices will tend to adjust to maintain that equilibrium margin, unless one believes that the retailers will now stop ripping us off and simply accept lower incomes.

One gets the sense that Oil Watchdog does not understand the concept of cost-benefit analysis, and instead subscribes to the simple belief that anything bad for the oil industry must be good for consumers. The representation of hot fuel as a willful fraud perpetrated by Big Oil, when Oil Watchdog has acknowledged that refiners deliver temperature corrected fuel to retailers, is negligent and cynical....  or just plain dishonest. There is an underlying perception that this issue is one of self-interest for Oil Watchdog, a feather in their cap so to speak, or perhaps justification for existence in a world where the recent steep drop in prices prove that oil companies cannot set those prices, thus muting many of Oil Watchdog's past charges. The rug being pulled from under its feet, Oil Watchdog needs a new pretext for its sources of funding.

Now, Oil Watchdog may in fact be correct on this issue. There is a lot of uncertainty in the data and therefore conclusions on hot fuel cost estimates, and future market responses to ATC installation cannot be predicted with certainty. But they make no credible case, and reasonable calculations based on their own numbers raise legitimate doubts as to who really benefits. Unfortunately, instead of pursuing an impartial quantitative analysis, they turn ATC into a witch hunt and go after the usual suspects. Their motivation appears above all else to be giving the oil industry a black eye; consumer benefit is assumed, and not investigated. The possibility that they could be wrong, and therefore that they could be hurting consumers, takes a back seat. There does not appear to be any due diligence on Oil Watchdog's part to demonstrate that their position on ATC would result in a net benefit to consumers.