Western New York's gas retailers making up for lean time
Lack of competition drives up WNY prices
Over the past four years, Tish Brinkman of Clarence grew accustomed to paying higher gasoline prices when she drove up to Potsdam in northern New York to visit her son at college.
But in October, she was shocked when gas prices were 30 cents lower there than at home.
“I think Western New Yorkers are being held hostage and I don’t know whether it is the gasoline companies or the retailers,” said Brinkman, a pharmacist who shops for the lowest gas prices during her daily drive to Buffalo General Hospital.
Gas prices in Buffalo Niagara — a region not known for its prosperity — have been among the highest in the country, provoking the question: “Why us?”
The main reason is that local retailers are charging more than their counterparts elsewhere in the state and nationally in order to make up for profits lost earlier this year, the retailers and their representatives acknowledge.
They are able to do so for two primary reasons:
• There’s a lack of competition in the Buffalo area between companies that both refine gasoline and directly market their products, allowing Sunoco — the largest such gasoline retailer in the area — to take a leading role in setting the price at the pump.
• Unlike other regions, there are fewer so-called “hypermarketers,” typically convenience stores that treat gas as a “loss leader” to lure customers into their stores.
In addition, there are other factors that affect price in Western New York:
• Native American merchants sell tax-free cigarettes and gasoline, taking thousands of customers away from off-reservation retailers required to collect and pay taxes. That leads some non-native merchants to raise prices on motor fuels to compensate for lower sales.
• State and local taxes on gasoline are among the highest in the country.
• There are no local refineries, causing the cost of transporting fuel to be passed onto motorists.
Refiners and retailers also find practically no regulatory oversight over wholesale and retail pricing, creating the conditions for high prices — and profits — to flourish.
“They charge whatever they can get away with; it’s that simple,” said Mike Conners, Albany County comptroller and an outspoken critic of high gas prices in upstate New York. He was referring to retailers and to the oil companies, who set the wholesale price and, as in the case of Exxon Mobil, reaped record-setting profits as prices topped $4 a gallon earlier this year.
“There has been no regulatory oversight at all. The failure at the federal level to do anything about it is monumental,” Conners said.
The current high profit margin is excessive, according to Charles Lindsey, an assistant professor of marketing at University at Buffalo’s School of Management.
“To my knowledge there are no supply-side, demand-side or tax factors that justify that excessive discrepancy. So the big question is, what gives? Why is there this discrepancy in terms of profit taking?” Lindsey said.
Defending high profits
On Friday, gas prices averaged $2.06 in Buffalo Niagara, some 41 cents above the national average of $1.65. Meanwhile, drivers in Syracuse were paying an average of 19 cents less a gallon than drivers here, while in Rochester the difference was 10 cents less, and in Albany it’s 17 cents less.
Gas station operators argue the recent profit margins, when looked at in isolation, don’t take into consideration their need to compensate for a miserable first half of the year.
Retailers and industry watchers say that when gas prices soar, as they did last spring, demand goes down and it becomes harder to pass along the entire increase in wholesale costs. The result is more money can be made charging $2.25 a gallon than $4.25.
“It’s counterintuitive. When prices go up, dealers make less. When prices plummet, they make more,” said Tom Kloza, publisher and chief analyst for the Oil Price Information Service, a leading source on petroleum pricing.
Between Jan. 1 and July 14, the gross profit margin in Buffalo Niagara was 9.8 cents a gallon, according to Fred Rozell, OPIS’ retail pricing director. The average margin in the U. S. during that time was 11.3 cents, a difference of 1.5 cents per gallon.
By contrast, the typical gross profit margin is 10 to 14 cents per gallon, Rozell said, from which retailers must deduct the wholesale price of the gasoline, credit card processing fees of about 3 percent, the local gas sales tax of 4.75 cents and other costs of doing business.
But gas station operators have more than made up for it in the last several months, The News found. Since July 15, when prices began dropping, through Dec. 1, the gross profit margin in Buffalo Niagara soared to 43.7 cents per gallon, some 16.8 cents above the national average of 26.9 cents.
The week of Nov. 24 saw the gross profit margin here reach 54.7 cents. In the other direction, the average retail price for Buffalo Niagara the week of April 21 was $3.58, yet the gross profit margin was only 2 cents.
Jim Calvin, head of the New York Association of Convenience Stores, warned of comparisons taken out of context.
“If you examine a year’s worth of data, instead of a snapshot, you’ll find there’s extreme lows and extreme highs, and historically these things even out,” Calvin said.
Developer Carl Paladino, who owns two gas stations in Buffalo and one in West Seneca, suggested the same thing.
“Why are prices higher here? They’re getting away with it. The whole line, from the providers to wholesalers to retailers, are all grabbing a little right now to try to make up for what they lost,” Paladino said, adding that competition will eventually drive the price down.
Brinkman questions why retailers here are trying to recoup losses in such a big way.
“If what retailers are doing here is a reasonable business practice, then why aren’t retailers across the state doing the same thing?” she asked, pointing out that retailers elsewhere stay in business and sell gas for less.
Calvin also points out that the high number of Native American tax-free smoke shops and gas stations in Western New York take away thousands of customers from retailers. That forces off-reservation retailers to charge more for lost business.
Sunoco stands alone
When Exxon Mobil sold off the last of its local gas stations in the past couple of years, it left Sunoco as the most powerful refiner and direct marketer in the area, operating 70 gas stations in Erie County alone.
One local gasoline distributor, who asked not to be named, said Sunoco is motivated not to lower prices.
“Sunoco prices at the pump have not dropped more because they are compensating for poor refining [profit] margins,” the distributor said. “When refining margins are good, they will keep the street price as low as they can in order to get the product through the refining channel. They make [most of their profits] through refining.”
In Rochester and Syracuse, by contrast, Sunoco competes with Hess, another refiner and direct marketer known for aggressively lowering its prices. Buffalo has no such competing powerhouse, industry observers say.
Like most refiners, Sunoco uses zone pricing, in which it assigns wholesale prices for its gas based on what the company believes the market will bear. Prices can vary at stations up to 20 to 30 cents a gallon because of a number of factors, which can include such things as individual arrangements with the dealer to pricing for a more affluent area, according to Jason Toews, co-founder of buffalogasprices. com, which tracks local pump prices.
Sunoco spokesman Thomas Golembeski declined to address specific questions about local pricing from a News reporter, sticking to company talking points.
“Sunoco prices its gasoline and all of our products competitively based on the market,” Golembeski said.
FTC investigating
The Federal Trade Commission began an investigation into retailers’ high gas prices last month at the urging of Rep. Brian Higgins, D-Buffalo. State Attorney General Andrew Cuomo’s office is also reviewing business records from a number of companies in the gasoline supply chain.
In New York State, price gouging is illegal only during a state of emergency. Collusion has to be proven, and as yet no evidence has surfaced.
“There is no more collusion than looking down the street and seeing what my competition is selling,” suggested Ralph Bombardier, executive director of New York State’s Association of Service Stations, based in Albany. “I don’t believe they know each other or talk to each other; I believe they are watching each other.”
It’s been widely believed that Buffalo Niagara’s high gas prices are partly because the region it is at the end of two gasoline pipelines that start in Linden,
N. J., and Philadelphia.
But Raymond Paul of the Association of Oil Pipelines discounted any significant impact on price in relation to transporting gas by pipeline.
“The average price for moving a gallon of gasoline [long distances by pipeline] . . . would be 2z cents, cheaper than you can mail a letter,” Paul said.
High gas taxes are a more significant factor. New York State adds 42 cents to a gallon of gas, fourth highest in the nation. In contrast, New Jersey, the lowest in the continental
U. S., is nearly a dime lower.
“New York has some of the highest gas taxes in the country, so it will have some of the highest prices,” said Towes of buffalogasprices. com.
The 18.4 cents in federal excise tax brings combined federal and state taxes to almost 61 cents a gallon. Retailers also absorb Erie County’s 4.75 percent sales tax on gas, which along with Oneida County is higher than any other in the state. And retailers pay high property taxes.
Despite the higher prices here, many Buffalo Niagara gasoline customers are glad they have dropped dramatically in recent months.
How long the trend continues is uncertain. OPEC oil ministers on Wednesday are expected to consider cutting production of crude oil. If so, that means Western New Yorkers could have less time to benefit from the big savings on gas enjoyed by most of the country.
lmichel@buffnews.com and msommer@buffnews.com
Log into MyBuffalo to post a comment
MyBuffalo is the new social network from Buffalo.com. Your MyBuffalo account lets you comment on and rate stories at buffalonews.com. You can also head over to mybuffalo.com to share your blog posts, stories, photos, and videos with the community. Join now or learn more.
Reader comments