To the Source:
"Retailers Cash In." Needless to say, this headline in an article printed in the June 30 Charleston (S.C.) Post and Courier and a similar one in the July 1 Atlanta Constitution caught my eye.
In Charleston, wanting to patronize our Virgin Island product, I purchased gasoline at a Hess station, paying $1.329 per gallon for regular. When I drove my grandson to our summer outing in Georgia, I paid $1.169 at a rural Exxon station. On St. Thomas, I pay around $2 per gallon.
According to the Associated Press, "Wholesale prices have plummeted in recent weeks, but gas stations have lowered prices more gradually." In fact, according to the New York spot market, the New York Gasoline Conventional Regular Spot Price (Wholesale) dropped about 25 percent in the last half of June. In real terms, "the average price for a gallon of regular unleaded gas is around $1.45 nationwide, down from the year’s high of $1.66 on May 14," according to federal Energy Department statistics.
In the article with the "Retailers Cash In" headline, the AP leads with the statement, "Gas stations are taking advantage of changing market conditions to rake in heftier profit margins during the busiest driving season."
The article further says that New York wholesale gas prices on the spot market "fell 23 percent, from 89.6 cents a gallon to 68.7 cents."
Retail fuel prices shot up across the United States this spring, in reaction to fear that there would not be enough product supplied to meet the summer demand. In response to the rising prices, producers increased their release of crude while refiners cranked their plants up to capacity. They met the demand, and there is now adequate supply; so prices should drop, which is what they have been doing.
One quote in the AP article that got my attention was this: "There is some avarice at work, as there is everywhere in our economy," said Peter Beutel, publisher of the newsletter Daily Energy Hedger. "They figure the consumer is used to the high price."
This comment took me back to my economics studies at Duke University many years ago. A professor had several of her acquaintances from the private sector lecture our class of budding economists concerning the real world of business. One supermarket chain executive said his industry worked on about a 4 percent markup, making its profit on volume. The next month’s speaker was from a major petroleum combine. When he finished his talk without mentioning profit margin and pricing, one of the students asked, "What markup does the petroleum industry use for its products?"
I will never forget the speaker’s pause and the look of consternation that passed over his face. "Markup?" he replied. "We don’t use a markup. We price our products at the highest level the traffic will bear. We strive to maximize our profits."
That appears to be the philosophy for the St. Thomas and St. John market. We have the classic case of adequate supply from Hovensa, stable demand by Virgin Island operators, and a striking lack of competition. There are two wholesalers on St. Thomas: Texaco and Esso. Now two executives don’t have to meet in a smoke-filled room to collude over pricing. Each simply just has to keep his cool and supply his stations at the same price as the other guy's. One would have to be stupid to kill the goose that lays the golden egg. The retailers are in the same position: Go with the flow and optimize profits.
The only possible competition for Esso and Texaco is Domino Oil Co., which was knocked out of the game when its tanker was turned in to the U.S. Coast Guard for lack of current inspection and remanded to a protracted yard job. Over the year that Domino is forced to purchase its supply from one of the two international giants, we can expect the company to learn the bitter truth of international commerce: Play ball or perish." In other words, Domino can be expected to become part of the problem, rather than an opportunity for at least a partial solution.
During the administration of the territory's first elected governor, a local businessman offered to put up a Hess gas station in the Sub Base area. Gov. Melvin Evans turned him down. It is my understanding this was in deference to one of Evans's primary financial supporters, a major petroleum distributor.
When the free market fails, it becomes necessary to bring government into play to protect the consumer from exploitation. As long as the petroleum companies can make a big profit, they will.
What government must do is determine what a fair profit is and then cap the retail price at a percentage above the market spot price. It appears that, just we regulate public utilities and transportation companies, it is time for us to regulate the petroleum distributors. We must work to live, and we must drive to work. Gasoline and diesel fuels are imperative to our economic and personal well being. The few industry players in the Virgin Islands are proving themselves to be driven by avarice, operating outside the socially acceptable standards of doing business.
We are unquestionably being subjected to the conditions which require — nay, demand — price controls.
It is now Gov. Charles W. Turnbull's time to step up and be counted. Who comes first with the administration, Virgin Islanders or a couple of gasoline distributors?
Kirk Grybowski
St. Thomas
