Service-Station Slugfest

When Atlantic Richfield Co. decided a year ago to eliminate credit cards and cut its gasoline prices by 30 per gal., competitors snickered. After all, 25% of drivers buy gasoline on credit. But when Arco's volume started zooming upward, the competition quickly retaliated. Exxon and Amoco, two of the nation's largest marketers, announced a discount-for-cash policy. And Shell counterattacked by accepting credit cards from Arco holders and converting them into Shell customers.

Gasoline price wars are often fought over a profitable intersection and sometimes engulf an entire city. Never before, however, has the entire U.S. been involved. With gasoline consumption declining, the battle has proved to be exceedingly costly to oil companies and retailers alike. According to Analyst Dan Lundberg, the average price per gallon fell an astonishing 150 between July 1982 and last February, from about $1.30 to about $1.15. Lundberg says only a nickel of the drop is attributable to a decline in the price of crude. The other 10-c- came out of the oil companies' profits and cost them a total of $2.3 billion.

So far, the battle is still going in Arco's favor. The company increased its market share last year from 3.8% to 4.8%, pushing past Chevron into seventh place among the major refiners. Some of Arco's gains have come at the expense of independent dealers who depend on the majors for their gasoline. An owner of independent gas stations in Massachusetts claims that price competition from Arco and British Petroleum (brand name: BP) has forced him to sell gas below cost. Even at that, he says, his retail price of $1.07 per gal. is still 4-c- above the price charged by nearby Arco stations. He moans: "We're losing $100,000 a month, and the worst thing is that I can't do anything about it."

Arco's surprisingly low prices are beginning to raise questions. Without mentioning the company by name, Morton Winston, the president of Tosco, an independent refiner that has run into cash problems and expects a $40 million first-quarter loss, decried Arco's practices. Said he: "The majors are selling finished products below the costs of the crude required to make them--never mind the refining costs. That is not competition, that is the use or abuse of economic power."

One way that Arco can afford its strategy is by finding ways to make federal laws work in its favor. Much of its oil comes from Alaska's North Slope. In shipping the oil to ports on the West and Gulf coasts, it utilizes an obscure Internal Revenue Service ruling that classifies the part of the voyage outside U.S. coastal waters as foreign economic activity. Thus the shipping cost can be charged off against foreign income, and certain overseas tax credits are allowed.

Critics charge Arco with imaginative bookkeeping. North Slope oil carries a federal windfall tax averaging about 68%. State charges add another 23%, for a total of 91%. If a company can juggle its books to transfer profits from its drilling operations to other areas, it can reduce the amount that is exposed to the high tax rate and pay the corporate rate, no more than 46%, instead. Critics contend that Arco does this by inflating its transportation costs. The company charges itself a high freight rate of about $4 per bbl. on oil it ships in its own tankers. The fee includes a so-called risk premium that is supposed to compensate independent tanker owners against the times when their ships are idle. Since Arco owns the ships and keeps them busy virtually year-round, such risks are obviously minimal.

Arco energetically denies that it is sheltering windfall profits in its transportation operation. Says George Babikian, senior vice president for marketing: "That is patently false." He asserts that it is "common practice" to classify tanker shipments from Alaska as foreign activity. As for the risk premium, he says, "Sure, we own the boat. We invested money to buy the boat, and we are entitled to a return on our investment."

There have been a few signs of a temporary truce in the gas war. Last month Arco raised the price it charges its dealers by 30 per gal. Some analysts predict that prices everywhere will rise about 40 to 60 per gal. at the beginning of the summer, with the onset of the heavy driving season. Even so, with refiners scrapping for a share of a declining market, there are likely to be more salvos in the price-cutting war. This file is automatically generated by a robot program, so viewer discretion is required.