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As SIGMA celebrates its fiftieth anniversary, each issue of Independent Gasoline Marketing during 2008 will recall a different decade in the history of the petroleum industry. Mark Ward, who has reported to IGM about the industry for more than twenty years, will look back through the pages of the magazine and other sources to reconstruct the highlights of the five decades in which the association has represented independent marketers.
And then came the 1970s In that momentous decade are the roots of the petroleum business as marketers know it today—price volatility, environmental compliance, self-service gasoline, convenience-store merchandising. Two significant dates spring to mind: April 22, 1970, the first Earth Day; and October 17, 1973, the first OPEC oil embargo. But before tracing their impacts and why they were such revolutionary events, recall first how the oil industry of the 1960s was a fundamentally different world than today.
The industry had been in continuous expansion for half a century. In 1970 crude production in the lower 48 states reached its all-time historic peak of 9.4 billion barrels per day. Though oil imports were rising, domestic supply still accounted for a majority share of the nation’s fuel consumption. World prices for oil in 1969 stood at less than $5 per barrel.
The major oil companies were enjoying a golden age of global influence. Gulf Oil built crude carriers that were the largest ships ever seen in human history. In full swing were national ad campaigns such as “Zoom! Zoom! Cities Services is CITGO Now” and Texaco’s “You Can Trust Your Car to the Man Who Wears the Star!” Mobil retired its Pegasus logo and adopted its streamlined red “O” trademark. Mergers in the 1960s produced what are now the ARCO and Exxon names. Sunoco and Conoco grew from small regional oil companies to worldwide enterprises. And in 1968-69 the majors first struck oil on Alaska’s North Slope.
Independent marketers tended to be smaller, privately-branded operations. In 1968 the retail outlets owned by SIGMA members averaged just over 45,000 gallons per month in fuel sales. Daily life for these marketers often consisted of price wars, while the majors frequently provided their own branded outlets with “price allowances” that subsidized constant competition on the street. Though self-service gasoline was launched in the 1960s, the concept had no real impact on the market until the following decade. And as the nation’s highway system expanded a few marketers began dabbling in sales of convenience items. But gasoline margins were still healthy enough to support independent fuel retailers.
OPEC Embargoes Oil
This state of affairs, which had evolved in the domestic oil industry over some 50 years, was suddenly shattered on October 17, 1973. That day the Organization of Petroleum Exporting Countries announced it had imposed an embargo against the United States in retaliation for its support of Israel in what became known as the Yom Kippur War.
War had first erupted between Arabs and Israelis in 1948 when the United Nations announced creation of the state of Israel. Though Israel successfully defended the new state, conflict was ongoing. The Suez Crisis of 1956 increased tensions, and then fighting broke out anew in the Six-Day War of 1967. Arab forces were soundly defeated as Israel captured the Sinai Peninsula and Gaza from Egypt, the Golan Heights from Syria, and the West Bank from Jordan. Soon afterward, however, the UN passed a resolution calling for the return of these territories.
Following the 1970 death of Egyptian president Gamal Nasser, his successor Anwar Sadat threatened war unless Israel—which had fortified the captured east bank of the Suez Canal—returned the Sinai and Gaza. In return he offered to conclude a peace agreement with Israel. But Sadat’s diplomatic offensive was unsuccessful as his Soviet patrons preferred a policy of détente with the United States rather than stirring new Middle East conflict.
At last Egypt and Syria joined in a surprise two-front attack on Israel. On October 6, 1973, the Jewish holy day of Yom Kippur, some 80,000 Egyptian soldiers crossed over the Suez Canal, while a force of 1,400 Syrian tanks invested the Golan Heights. After the commencement of hostilities some nine Arab states aided the attacks. By the third day, however, Israeli forces had mobilized and decisively beat back the Arab offensives. The fight was carried deep into Egyptian and Syrian territory, as Arab forces were saved from annihilation by UN intervention.
By the time a UN cease-fire was brokered October 22 by the United States and Soviet Union, the two superpowers had been drawn into the conflict. After the Soviets launched resupply operations to Egypt, the U.S. countered by airlifting arms to Israel. President Nixon authorized $2.2 billion in aid.
American support for Israel prompted OPEC to cut oil production and halt shipments to the United States. On October 16 five Arab nations unilaterally hiked oil prices by 17 percent. The following day OPEC oil ministers approved an embargo. Then a 25 percent cut in production was announced November 5. Three weeks later President Nixon signed the Emergency Petroleum Allocation Act.
By January tensions began to lessen as OPEC canceled further production cuts and froze oil prices. Progress is disengaging Arab and Israeli forces led in March to cancellation of the embargo. Yet the psychological impact on Americans—who were forced to wait in long “gas lines” to fill up their cars—was profound and has endured to the present day. In February 1974 the Nixon Administration unveiled “Project Independence” and the nation has been striving to gain energy self-sufficiency ever since.
Other impacts of the embargo were just as profound. Imports of crude oil fell 30 percent. Prices tripled to $12 per barrel. Almost overnight, Arab nations which had depended on Western investment to develop their oil resources could accumulate vast wealth and think of nationalizing their oil industries. Meanwhile, average retail gasoline prices in the United States rose from 38.5 cents in May 1973 to 55.1 cents. in June 1974. Home heating oil prices rose 91 percent by 1975. Within six weeks after the embargo was imposed, the New York Stock Exchange lost nearly $100 billion in value. And in 1974-75 the U.S. economy went into recession.
Government price controls, which had been implemented to encourage oil exploration, worsened the immediate supply situation. Since the controls stipulated that alreadydiscovered “old oil” must sell for less than “new oil,” the rocketing prices quickly prompted withdrawal of old supplies from the market. The resultant scarcity of supply led to retail gas lines.
The oil crisis sparked a host of conservation and rationing schemes. Through 1976, consumers with odd-numbered license plates could only buy gasoline on odd-numbered days of the month, and those with even-numbered plates could make their purchases on even-numbered days. Some states adopted a flag system requiring service stations to display red flags when no gas was available, yellow when sales were restricted or rationed, and green for unrestricted sales. A national highway speed limit of 55mph was imposed in 1973 by executive order of President Nixon, who also appointed William Simon as his “energy czar.” Daylight savings time was mandated year-round through 1976. And in 1977 a cabinet-level Department of Energy was created, while the nation’s Strategic Petroleum Reserve was established in underground salt caverns beneath Texas and Louisiana.
Though the Advertising Council mounted a “Don’t Be Fuelish” campaign, American automakers were ill-prepared for conservation. Before the embargo, “muscle cars” reigned in Detroit. A 1971 Chevy Caprice sported a 400-cubic-inch V8 engine and a wheelbase of 121.5 inches. Meanwhile, the 1972 Chevy Impala yielded 15 miles per gallon—in highway driving. Not until the end the decade was downsizing the rule for most American cars. By then, fuel-efficient automakers from Japan and Europe—Honda, Toyota, Mazda, Nissan, Volkswagen, Peugeot—had already penetrated the U.S. market and were racking up record sales.
Ironically, the 1973 embargo had unintended effects for OPEC as well. The organization was unable to maintain unity as its members individually sought to regain market share and thus increased production. For years Arab oil economies had prospered by facilitating a steady market of gradually increasing consumption. With oil cheap and plentiful, Western consumers of the 1950s and 60s were glad to literally go along for the ride.
By contrast, the unleashing of high prices in the 1970s created incentives for increased oil exploration and development of alternative energy sources. Motors were made more efficient. Petroleum was replaced by other fuels for many industrial applications and in the generation of much electric power. Domestic petroleum demand, which stood at 18.8 million barrels per day in 1978, fell by 1983 to 15.2 million barrels—the lowest level since 1971.
A second oil crisis in 1979, brought on by the Iranian Revolution, only reinforced these lessons. The price of oil briefly spiked that year at $80 per barrel and gas lines appeared once again at retail service stations. Oil prices rose from about $14 per barrel in early 1979 to more than $35 two years later, before stabilizing at about $28 in 1983. But between 1980 and 1986, reduced demand for oil, plus new production from non-OPEC sources, resulted in a price decrease of 46 percent. Adjusted for inflation, oil prices at times sunk to levels not seen since before the 1973 embargo.
The six-year oil glut weakened most OPEC members and drove some near bankruptcy. Led by Saudi Arabia, OPEC cut production in an attempt to shore up sagging prices. But the high prices of the 1970s had already prolonged the life of marginal U.S. wells and stimulated oil development in the North Slope, the North Sea, Mexico, and Canada. As a result, OPEC oil fell from 50 percent of total world production in 1978 to just 31 percent in 1985. The combination of OPEC production cuts, plus increased production from other sources, halved OPEC’s share of U.S. crude oil imports from 82 percent to 41 percent.
Sweeping Industry Changes
The impact of the 1970s oil shocks on the petroleum business cannot be overstated. The challenges of the decade for the major oil companies are exemplified in an official BP history that notes, “The sudden sweep of changes in the Middle East from 1971 onwards caught the industry by surprise,” and that “almost every oil-rich nation in the region—Iran, Iraq, Saudi Arabia, Abu Dhabi, Qatar—announced that if they weren’t nationalizing their resources immediately they would within the next 10 years. The effect on BP was profound.”
BP had transported 140 million tons of oil from the Middle East in 1975, but by 1983 shipments dwindled to just half a million tons. “Over roughly the same period,” the company reports, “Middle Eastern oil would go from 80 percent of BP’s supply down to a meager 10 percent. As a company that had once staked its entire strategy on Middle Eastern oil, BP found that its world had now been fully turned inside out. Fortunately BP had recently discovered major oil fields in other parts of the world” off the coasts of Alaska and Scotland.
The other majors faced similar challenges. But despite billions invested during the 1970s to develop new sources of non-OPEC crude, such success stories received scant press coverage. Instead the media, aware of consumer anger over high gasoline prices, favored sensational reports about “Big Oil.” As the ConocoPhillips company history points out, “In the 1970s, the U.S. oil industry was challenged by two Arab oil embargoes, intense government scrutiny and a public outraged over long lines at service stations. Once heralded by the media for heating homes and powering the freedom of Americans on the road, the oil industry was routinely vilified in the press.”
A sampling of 1970s headlines suggests the mounting public relations challenge: In 1975 the chairman of Gulf Oil was forced to step down after reported allegations of “illegal political contributions.” The phrase “oil spill” entered the common vocabulary in 1978 after the Amoco Cadiz ran aground off the coast of France. Also in 1978, residents of New York’s Love Canal region—living near land polluted by a defunct chemical company that was bought a decade earlier by Occidental Petroleum—reported elevated incidence of cancer and birth defects.
The new realities of the 1970s had just as profound, but also different, impact on independent marketers. First and foremost was the question of fuel supply. In later decades the majors would eventually move away from their former emphasis on vertical integration of both upstream and down, while many independents would in time brand up as a way of securing their supplies. But during the 1970s independents faced the prospect of major-oil refineries favoring their own branded outlets in providing scarce fuel supplies. The majors also remembered the price wars of the previous decade and were in no hurry to help independent competitors.
A 1988 issue of Independent Gasoline Marketing published for SIGMA’s thirtieth anniversary looked back on the 1970s as a time when “Essentially, government controlled the price and allocation of gasoline. Terms like ‘margin relief’ and ‘downward certification’ became familiar.” In the article (see IGM, October/November 1988), past SIGMA president Newell Baker—who served from 1974 to 1976— recalled, “We were trying to get out of this allocation mess so we could wheel and deal again. We had to figure out a formula to get out from under these controls, and then it dawned on us that the majors liked the controls. They had never made so much money.”
Thus independent marketers, who in the 1960s had built their business model on price competition with the majors, now faced government price and allocation controls which stymied that model. The majors were reaping record revenues from high oil prices, even as controls limited the freedom of their independent competitors at the retail level.
Baker’s successor Herb Sostek served as SIGMA president from 1976 to 1978. As CEO of Boston-based Gibbs Oil, a post he held from 1963 to 1980, he recalled in a recent interview the contrast between the 1960s and 1970s.
“In the 60s,” Sostek remembers,” independent marketers focused on price. Even one or two cents at the pump made a big difference, so that price wars were common. But after the 1973 oil embargo we had trouble getting supply.” With some 500 Gibbs Oil retail outlets across New England and New York, he says, “Supply was our biggest concern in the 1970s, along with the big investments we had to make in complying with the new environmental regulations. Those two things, taken together, made it a really tough time for independents like us.”
With the old strategy of price competition overtaken by events, Gibbs Oil—like other independents—had to look for new business models. “We started self-service gasoline in the late 1960s,” Sostek relates, “but didn’t really get into the conveniencestore business until the 1970s. We did a c-store pilot at five of our sites in the early 70s and then decided to rollout the concept to as many locations as possible.”
As the 1970s progressed Sostek discovered that convenience merchandising helped his company respond to a changed marketplace. “We started by converting old service bays into store space,” he recounts. “Gasoline margins had become thin, so we wanted to generate more revenue from our properties. And self-service gas became a necessity, because it got increasingly hard to find labor willing to pump gas in the winter. Also, highways were being expanded and people were moving away from the core cities and into the suburbs.”
The c-store model enabled Gibbs Oil to viably build more sites in the places where people were on the go. “We built fuel pumps, along with small kiosks for selling convenience items,” Sostek says. “At the time we didn’t see ourselves competing with 7-Eleven or with the grocery stores. Even so, we realized that food was a different type of operation and we needed to hire people who had food merchandising experience.” Yet with the Gibbs family owners ready to retire, in 1980 they sold the business and decided to leave the challenges of pioneering new business models to a new generation of marketers. In fact, for all the tough times of the 1970s, the decade saw independent marketers truly emerge as vital players in the petroleum industry. As the 1988 IGM article pointed out, by the end of the decade “many of SIGMA’s original members had retired or cut back on their involvement, [but] a new crop of young, energetic marketers began to emerge—the survivors of the terrible 70s.”
For one thing, the price spikes of the 1970s were starting to erode consumer loyalty to national gasoline brands. Motorists simply looked for whatever gasoline was available and most affordable. The majors countered with ads touting the allegedly superior quality of their products—such as the “Mr. Dirt” campaign run by Mobil during the early 70s. Nevertheless, independents posted impressive gains.
The total number of outlets represented by SIGMA members soared from 7,700 in 1968, to some 16,200 outlets in 1978. Just as significant, the average volume of these outlets rose from about 45,000 gallons per month in 1968 to more than 64,000 gallons in 1978—an increase of some 40 percent. The new business model forged by the end of the 1970s bore fruit in the years to come, as SIGMA member outlets averaged a monthly volume of 109,000 gallons by 1988.
The evolving business model was reflected in site design during the 1970s. A panel of architects interviewed by Independent Gasoline Marketing in 1996 (see IGM, Fall 1996) characterized the decade as an era which “saw the marriage of service stations and convenience stores and the emergence of the island marketer. Still, station design continued to reflect the identity of each gasoline brand.”
Architect Jim Mitchell explained how the original idea, of simply converting old service bays, gave way to purpose-built stores. “As functions changed,” he noted, “design changed too. By the 1970s gasoline stations were installing coolers and shelves for food items and drinks... And since location was more important than image, stations and stores were mostly designed as functional boxes.”
The new model of fuel and food “killed the traditional service station with service bays,” Mitchell continued. “Selling food was more profitable and labor costs were less. From that came, in the 1970s, the ‘island marketer’ concept.” Prior to the 70s, he observed, “pumps were close and parallel to the street so the public would see the fuel offerings. Then as stations located themselves for high volume, cities began restricting entrances to control traffic.”
Allowed only one or two curb cuts, fuel retailers of the 1970s turned to the “island marketer” design. “Fuel islands were located perpendicular to the street,” Mitchell pointed out, and then “a small ‘shoebox’ store building was then put in the middle with the islands on either side. The design became so standard that, from one marketer to the next, only the color schemes differed.”
As the fuel-and-food concept continued to draw more customers, however, retailers of the 1980s discovered that the island marketer design afforded too little parking. By the late 70s marketers were also learning another lesson. As architect Coney Elliott told IGM in 1996, “As it related to site planning [in the 70s], companies that were historically gasoline marketers usually wanted to facilitate fueling even at the expense of food sales. For their part, c-store operators would favor their traditional business and give parking a higher priority than fueling.”
Yet as the marriage of fuel and food continued during the decade, Elliott explained, “This idea of ‘dual identity’ sites began in the late 1970s and early 80s. It’s an evolution that’s still in progress.”
Environmental Movement
One other storyline is necessary to tell the petroleum industry’s tale in the 1970s. Like the oil crises of the decade, the 1970s emergence of the environmental movement was also several decades in the making.
The federal government first began to study the causes and effects of air pollution after a 1948 disaster at a zinc works in Pennsylvania, where an atmospheric inversion put the town of Donora under a cloud of fluoride that killed 20 residents. The incident led to the Air Pollution Control of 1955. That same year, public controversy over federal plans to construct a dam at Utah’s Dinosaur National Monument prompted introduced of the Wilderness Bill, which was ultimately enacted by Congress in 1964.
Two years later, in 1966, plans for a Grand Canyon dam aroused public outcry and forced the 1968 cancellation of the project. Then the Santa Barbara oil spill of 1969, which leaked from offshore wells owned by Union Oil and fouled beaches along the Southern California coast, brought more public concern. That year Congress passed its first major environmental legislation, the National Environmental Policy Act, which established the Environmental Protection Agency (EPA).
That set the stage for passage of the Clean Air Act Amendments of 1970, which greatly strengthened and expanded upon the 1955 Air Pollution Control Act and original 1963 Clean Air Act. At a single stroke, the EPA was empowered to enforce the National Ambient Air Quality Standards and, by 1971, set limits on sulfur dioxide, nitrous oxides, carbon monoxide, ozone, non-methane hydrocarbons, and total suspended particulates. A lead standard was subsequently adopted in 1978.
As the Energy Information Agency (EIA) explains, “The 1970 CAA Amendments also permitted the regulation of fuel additives. It established a schedule for reducing lead additives and required automobile manufacturers to design and construct vehicles that could run on lowlead and unleaded fuel. The legislation required that all gasoline stations of specific sizes offer at least one grade of unleaded gasoline (minimum 87 octane) by July 1, 1974.
“The allowable lead in gasoline was reduced to 1.1 grams per gallon in 1982, and a system of waivers was established that allowed refiners to build up lead credits. Further reductions in July 1985 and on January 1, 1986, brought the allowable lead to a maximum of 0.1 grams per gallon. The lead credit program was ended on December 31, 1987, when a maximum lead content of 0.1 grams per gallon was strictly enforced. All grades of gasoline are required to be completely lead-free as of January 1, 1996.”
Lead had fist been introduced as an octane enhancer in the 1920s. By the early 1970s, EIA explains, “When the maximum allowable lead in gasoline was 4.0 grams per gallon, 2.5 grams per gallon were typically blended into gasoline. Producing high-octane gasoline without lead required greater use of complex refining techniques to increase the octane of gasoline blending components, which increased production costs.” Yet under the goad of federal mandates, by 1980 unleaded gasoline accounted for 27 percent of motor gasoline produced in the United States. Meanwhile, the 1973 introduction of the catalytic converter—which is incompatible with leaded fuel—helped push unleaded gasoline to 55 percent of domestic consumption by 1983.
On the upstream end, Clean Air mandates of the 1970s were having an impact on refineries. “By 1979, carbon monoxide (CO) emissions were 68 percent lower, emissions of total suspended particulates were 50 percent lower, sulfur dioxide was 19 percent lower, and nitrogen oxide emissions were 18 percent lower than in 1970,” notes EIA.
Following the first Earth Day on April 22, 1970, the achievements of the environmental movement continued to mount. The pesticide DDT was banned by the EPA in 1972, ten years after publication of Rachel Carson’s Silent Spring alerted America to the problem. That same year the Water Pollution Control Act was passed over President Nixon’s veto. A year later the Endangered Species Act was signed into law—and upheld in a landmark 1977 Supreme Court ruling which stopped construction of Tennessee’s Tellico Dam, in order to protect the tiny snail darter fish. Then at the end of the decade, in 1980, environmentalists achieved passage of the Alaska National Interest Lands Conservation Act which designated more 100 million acres of parks, wildlife refuges, and wilderness areas.
However, the tension between energy policy and environmental policy is most evident in one simple fact: Not a single oil refinery has been built in the United States since 1976. The costs of environmental compliance, and the certainty of local opposition and years of lawsuits, have made further expansion of the nation’s refining capacity moot. Since 1977, says a 2004 Energy Department
report, that capacity has risen just 2.4 percent—while domestic demand for gasoline has jumped 27 percent during the same period.
Thus the legacies of the 1970s still define the petroleum industry today.
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