Last month, Ed Trudeau, co-owner of the Vista Gas Station in Burlington, Wisconsin, drove an 8,500 gallon tanker truck to a competing Citgo Station for a fill-up. Although he managed to pump only 343 gallons before employees cut the flow, Trudeau made his point. The Citgo had been selling gas below cost, a violation of Wisconsin state law. By the time his truck pulled out of the driveway, Citgo employees were raising the price on their sign.
At $1.69 a gallon, Citgo’s price was below what Trudeau could buy wholesale and well below the $1.85 his own station charged. State law requires gas stations to charge 6 percent more than their invoice price or 9.18 percent above wholesale, whichever is more.
Twelve states have similar laws, which are designed to prevent large corporations from driving smaller businesses out of the market by slashing prices below cost. Over the long-term such predatory tactics eliminate competition and lead to monopoly pricing.
California is a case in point. The state has no law prohibiting below cost gasoline sales and has among the highest prices in the nation. A 1999 study by the state attorney general concluded that predatory pricing is to blame. Competition has been virtually eliminated in the state. Just six companies now control more than 90 percent of the market.
Many of the existing minimum markup laws have been on the books for decades. This year has seen a burst of renewed interest, with several states considering legislation. Maryland recently adopted a law prohibiting sales of gasoline below cost. In Minnesota, under legislation awaiting the governor’s signature, gas stations will be required to price gas six percent above cost. A similar law won a strong majority in the Tennessee legislature, but was vetoed by the governor.
Part of what’s driving these new rules are concerns about the growing power of a handful of large, vertically integrated companies that own both refineries and gas stations, and can thus manipulate both the wholesale and retail price of gas.
Another significant factor is the growth of gas stations installed at Wal-Mart, Sam’s Club, Costco, Kroger’s, and other large retail stores. These retailers often use gasoline as a loss leader to draw customers to the store, making it impossible for nearby independent stations to compete.
Through a partnership with a refiner, Murphy Oil Company, Wal-Mart has installed gas pumps at 340 of its stores and 90 of its Sam’s Clubs locations.
In Florida, Murphy Oil has been charged with selling gas at its Wal-Mart outlets below cost, a violation of state law. Wal-Mart and Murphy have launched a lobbying and petition drive to convince legislators to repeal the law.
In Oklahoma, where retailers are required to markup gas by six percent, Murphy was recently sued by a group of independent station owners. Murphy contends the law is unconstitutional. The case will be tried by a federal court.