A rural Pennsylvania gas station closes after 40 years because fuel prices rise so high. By contracting for fuel with a large corporation, and having insufficient alternative revenue, it had no choice but to leave the market. Learn more about this from the following article in Money Morning.
I am a great believer in the American entrepreneurial spirit. In fact, the U.S. economy stands or falls on our ability to provide enough space to allow small folks to have big-time dreams.
However, when times get difficult, some little folks end up under the bus — along with their dreams.
To understand what I mean, let’s take a look at my friend Sam.
Many of you may remember Sam, the proprietor of an out-of-the-way rural service station situated outside of Pittsburgh. I introduced him to Money Morning readers last summer in an essay: Gasoline-Price Forecasting: What Sam the Gas Station Owner Knows That We Don’t.
I’ve known Sam for years.
So I was stunned to discover that he’s throwing in the towel.
The End of an Era
Over the years I’ve known Sam, he’s become my ready barometer into the local gasoline market. Due to an arrangement with his only sister’s husband (he can never quite call the guy his "brother-in-law"), Sam would receive his gasoline delivery two days before just about everybody else in the area.
In turn, Sam would provide me with a two-day "heads up" on where local retail prices were headed.
I stopped by Sam’s station this past weekend, intending to chew the fat and catch up on the latest market musings from a fellow who has been there for more than 40 years.
But I got something else, instead – a real shock.
Sam’s station is closing.
Sam had an arrangement with one of the top five U.S. providers of retail fuel – you know, one of the "Big Boys." Although he ran a quasi-independent operation – and the station was his – he was still required to contract for his gasoline with the Big Boy whose logo hung out on the state road.
In short, Sam was the proprietor, but not completely his own man.
This Big Boy determined the pricing at the pump by setting the price Sam had to pay for the gas it sold to him.
When wholesale prices rose quickly – as we’ve seen occur nationwide over the past several weeks – guys like Sam could not pass all of that increase on to the retail customer. The competition just down the road, in the larger communities, would eat him alive.
So, just like last summer, that meant he was stuck relying on sales from his tiny convenience store – maps, candy, etc. – to make up for the shortfall at the pumps.
This time, however, something else was afoot.
Gasoline Price Outlook
I asked Sam if the station would revert back to the company on the sign, the one having a contractual right to set his prices.
"No," Sam answered. "[Company name withheld] has decided to consolidate its brand market share and redirect traffic to its larger stations locally."
Sam’s station only has six pumps (when they are all working). He had a difficult enough time competing as it was. This time around, [the Big Oil company] made it impossible to compete by effectively reducing his margins to near zero.
By deliberately pricing his gasoline high, the unnamed Big Boy just ran him out of business.
As I said, Sam could never just charge what he needed to overcome the shortfalls. Nor could he cut his prices to generate additional business, hoping to increase sales volume.
For one thing, he had insufficient alternative revenue flow to make it for very long.
Besides, he is tied into a supply agreement with a major vertical oil company, the kind of heavyweight that controls the process from the oilfields, through the refineries and distributors, all the way down to setting the effective price at retail outlets. This even affects the outlets that the Big Oil company does not control.
If Sam did try to cut prices to generate business, the Big Boy providing the product would penalize him for undercutting the larger distribution market (which is home to other stations that are owned by, or leased from, the major).
The Oil Major makes far more money controlling area-wide access to product than it gets paid by the likes of Sam. So the Big Boy’s control over pricing is increasingly important to its bottom line.
If the major decides it is time for guys like Sam to leave the business, my friend has nowhere to go.
The End of "Real" Competition
Sam’s son Tony was also working when I stopped by.
I asked Tony if he would buy the station, to keep it in the family. He simply shook his head.
"No future here," he finally admitted.
Nobody else is likely to buy it, either – at least not as a gas station. They will probably dig up the tanks, do an EPA evaluation, and ultimately turn it over to the next apartment complex developer.
I’m not naïve — I recognize that this is how markets operate. The planned destruction is needed to make way for the next generation of development.
Only the next time you complain about the rising price of gasoline, remember this: My gasoline price outlook calls for higher prices. One of the primary reasons the price can rise so quickly – and stay there – is the decline in genuine market competition. And a good part of the lack of competition comes from having fewer Sams.
We will still see each other now and then for a beer at the VFW hall. But it won’t be the same.
I have also lost my "early window" into local market prices.
Then again, there should be a bigger station that also has an early delivery schedule.
But how do I strike up a conversation with a credit card slot?
This article was republished with permission from Money Morning.