September 17, 2001

THE MORNING AFTER: PRICE AND SUPPLY SITUATION

A few years ago, there was a movie entitled "The Morning After", dealing with the aftermath of a nuclear war. While the events of the past week certainly have not been anything approaching nuclear war, the psychological effects on Americans have been massive. As we all attempt to return to work and "normalcy" this week, a quick "look back" at the week and our industry's response to events seems appropriate.

PRICE SPIKES: In the immediate aftermath of the terrorist attacks, wholesale (rack) prices reportedly spiked by a half dollar a gallon in some markets. These panic reactions were for the most part reversed within a period of less than 12 hours. Likewise for price spikes at the retail level. While the news media focused on a few stations nationwide - mostly in the Midwest and some parts of the South - posting prices in the $3 to $5-per-gallon range, these were very spotty and rare occurrences that were likewise reversed within 24 hours. However limited they were, they created a serious and potentially long-term "black eye" for the industry.

PANIC BUYING: The brief price spikes were apparently caused by panic buying - primarily by consumers, but also some by dealers and marketers. The fact that the problem seemed to turn around so quickly seems to be testimony to the industry's and government's good job in getting the word out that there was no reason for panic.

PRICE "GOUGING": The price spikes led to a flurry of charges by state and federal officials of price gouging by gasoline retailers. The U.S. Energy Dept. and many state Attorneys General set up "hotlines" or websites to collect reports of price gouging. In retrospect, these appear to be little more than political grandstanding. A special Lundberg Survey of gas stations nationwide on Sept. 13 - 2 days after the attacks - found an average 1.1 cents-per-gallon increase since a regular Sept. 7 survey, with no stations in the survey engaged in price gouging, and with a normal mix of some price increases and some price decreases. The Lundberg Survey also noted that the rate of price increases from Sept. 7 to Sept. 13 was actually slower than prices had been increasing in the 4 weeks from Aug. 10 to Sept. 7. Oil Price Information Service (OPIS) likewise reports that, as of Sept. 14, retail prices were typically up only 2 to 3 cents per gallon from pre-attack levels, and that even with those increases retailers had not yet fully passed on the 25-cents rise in wholesale prices in the preceding month.

SHORT-TERM SUPPLY: On the day of the attacks, some terminals and some pipelines shut down briefly, apparently for security reasons. These shutdowns contributed to the brief panic buying, but didn't seriously affect supply. There has been a direct impact on areas served through New York Harbor due to the "closure and subsequent slowdown of barges" moving out of the harbor, according to OPIS and our own members. In addition, new security precautions have resulted in some slowdowns for those supplied through other ports as well. Despite regional tightness of supply - a situation aggravated by boutique fuels - the general supply situation seems quite adequate.

UNBRANDED SUPPLY: SIGMA has received numerous reports of dramatic and sustained unbranded rack price increases, leading to serious price inversions. In some cases, marketers are hard-pressed to find unbranded supply at any price. These reports are substantiated by OPIS, which indicates current inversions of 20 to 25 cents per gallon of unbranded rack over branded rack. OPIS adds that unbranded customers "may pay much higher prices for gasoline or diesel in the next few weeks" - a prospect that would appear to be economically unjustified given the adequacy of the overall supply situation, and something that SIGMA is very concerned about.

NYMEX: The New York Mercantile Exchange (NYMEX) is expected to reopen for energy trading this morning (Monday, Sept. 17) or soon thereafter. This will return some transparency to pricing which may help stabilize the situation even further.

KUDOS TO EPA: While other government agencies were attacking our industry, the EPA actually took action to help ease the supply situation - providing waivers to allow for early selling of wintertime gasoline to ease supply crunches. (In fairness, many other state and federal agencies joined in efforts to calm the public and head off panic buying.)

THE MORNING AFTER: OTHER INDUSTRY RESPONSES

Like other parts of American society, our industry has responded with generosity and caring in reaction to the unspeakable crimes committed against our nation. For example, Family Express Corp. has joined with an American Legion Post to establish a joint relief fund for the children of the victims who died in the attack on the Pentagon. Numerous other examples could be cited. The National Association of Convenience Stores (NACS) has available on its website (www.cstorecentral.com) a document outlining ways marketers can assist in relief efforts, help with morale issues, and deal with customer tensions and ethnic hostility.

America is a very diverse nation, and our industry represents that diversity as strongly as any industry - in our dealer networks, our employees, and our customers. There have been numerous reports in the press about individuals venting anger at Muslims in general and persons of Arab background in particular in recent days. Some of this is directed at our employees and dealers. But we have heard at least one instance where it was directed by an employee against a customer. Marketers can help reduce these tensions by reminding employees that anti-discrimination laws apply not only to race but also to religion and national origin. As we fight the coming war against terrorism and the ethnic, religious, and nationality hatreds and intolerance that fuel it, we must take care to be sure we don't become a mirror image of the "enemy."

LEGISLATION POSTPONED

As Congress has moved quickly to deal with the terrorist attack, other pending legislation has dropped from the radar screen. Superfund liability relief was scheduled for a vote on the floor of the House last Tuesday; it has now been postponed indefinitely. Many other Congressional hearings and markup sessions have also been postponed. Many in the environmental community expect that environmental legislation will take a back seat to security issues over the coming months. This is probably true of other legislation of direct concern to our industry.

SIGMA ATTENDS EPA MEETING

SIGMA participated in the scheduled meeting with EPA under the auspices of the EPA Small Business Ombudsman last Friday. Normally these meetings are with the EPA Deputy Administrator. However, this time the Deputy Administrator was unable to attend; the meeting was run by Tom Gibson, the Assist. Administrator for Policy and Environmental Information. This series of meetings began nearly 12 years ago, in the first Bush Administration, and continued through the Clinton Administration.

Among the topics discussed at the meeting was the issue of treating governmental agencies more leniently on tank violations. Earlier this year, and Administrative Law Judge had suggested that governmental agencies have no "economic benefit" from failing to obey the rules, and thus under EPA's policies there should be no such penalties. SIGMA pointed out that state and local governments are much of the remaining UST problem, and there is no reason to give them special breaks in enforcement. We were later assured that a special assistant in EPA had put out the recent memo suggesting this policy, and that the professional staff is on our side in the matter.

MISCELLANEOUS TIDBITS

Maryland has a new below-cost selling law which takes effect October 1. It is being criticized by Wal-Mart, but has the strong support of SSDA.

Rep. Bonior (D-MI) has announced he will step down as Democratic Whip in the House of Representatives, the number 2 party position behind Minority Leader Gephardt (D-MO). The battle to succeed him is between Rep. Nancy Pelosi (D-CA), considered the more liberal contender, and Rep. Steny Hoyer (D-MD).

The European Union is moving to "harmonize" excise taxes on fossil fuels, which currently vary considerably from one country to another. For example, the current tax on diesel ranges from just under $1 per gallon to nearly $3. The medium-range goal would be to tax both gasoline and diesel fuel similarly in all member states for all users.

Chevron has joined the list of companies agreeing to settle the lawsuit over MTBE contamination at Lake Tahoe, agreeing to pay $10 million. Most major oil companies have now settled, with Shell and Tosco being noteworthy exceptions. The trial begins this month.

SIGMA MEETINGS

SIGMA's Annual Meeting in Seattle Nov. 10-12, and the Winter Management Conference in Steamboat Springs Jan. 20-23 will both go forward as planned. At this point, we anticipate that air travel will have returned to something approaching normalcy long before either meeting. For the Seattle meeting, our education and supply focus will be intensified. Also, we anticipate "loosening up" some on cancellation deadlines, so nobody feels compelled to make a hasty decision to cancel.