Motorists trim demand, win lower prices at pumps
American car drivers are getting a pleasant lesson in economics at the gas pump: When demand drops, so does price. ''You can almost watch a daily price drop,'' says Ralph Bombardiere, of the New York State Association of Service Stations.
Since last July, the price of gasoline has been steadily dripping downward. At some self-service stations, consumers are filling up with regular gas for less than $1 a gallon, and as low as 85 cents in some places.
The drop, experts say, is not due to any disagreements rattling the OPEC (Organization of Petroleum Exporting Countries) cartel. Demand has simply backed off. And that retreat is likely to keep gasoline prices down, at least for the near term.
Demand for gasoline has fallen 5 to 6 percent a year for the last three years , says a spokesman for the American Automobile Association (AAA). Trying to cope with that and an excess supply of gasoline, gas stations have become intensely competitive in trying to attract customers.
''It's almost a backwards situation,'' Mr. Bombardiere says. ''Competition at the retail level is so fierce, it has climbed the ladder to the oil companies'' and up to OPEC, he says. ''It's the falling end-product prices that have put pressure on crude prices,'' agrees Chris Kiersted, spokesman for Texaco USA.
Consumer demand is not expected to pick up and excess supply is not exactly evaporating. ''We (consumers) haven't responded to price cuts. . . . There is no strong signal from any quarter that supply will become tight or that there will be a big increase in demand,'' says Trilby Lundberg, editor of the Lundberg Letter, which tracks gasoline prices. ''It's logical to say . . . that prices will continue to fall,'' she adds. The average nationwide price of a gallon of gas, including all grades, has fallen 16 cents in the past six months.
A pump with a lower price cheers up the consumer, but it has the opposite effect on retailers. For the past few weeks, says Ms. Lundberg, retail prices have been falling faster than the wholesale prices dealers pay for their gasoline. Profit margins at service stations are deteriorating.
''The squeeze is on,'' says William Donovan, regional sales manager for Atlantic Richfield Company's New England division. ''We are becoming more competitive every day.'' ARCO closed about 26 stations in the New England region last year, ''and we will continue to close more marginal units,'' Mr. Donovan says.
Last year about 7,000 gas stations pumped their last drop. The latest phenomenon has been retailers selling their gas below cost. ''Any time, any city in the country today, you can see leaded regular at five, six cents below cost, '' says Vic Rasheed, executive director of Service Station Dealers of America.
Suppliers have put pressure on service stations to sell a minimum amount of gas, Mr. Rasheed says, and this has prompted more price cuts to increase volume. Retailers have been trying to make this loss up in premium and unleaded gas and services, but in the last few weeks, even these prices have been dropping.
Stations seem to have tried every marketing and cost-cutting trick in the book - price cutting, cash only, self-serve, gifts, food stores, chances for free cars - even banking, at gas stations in Baltimore. Still, they will have to think of other alternatives, observers say.
Gas stations that survive will either depend completely on mass-volume traffic at totally self-service, automatic paying stations, or on lower volume tied to another business. This process has already started, experts say, it just needs to crystallize.
Mr. Donovan, at ARCO, says the strategy his company has test marketed in Boston and Los Angeles has been very successful. ARCO, which is on the way to 100 percent self-service, according to Donovan, is now moving forward with the idea of ''niche marketing.''
Today, the company kicks off an ''MP&G'' (mileage, performance, and guarantee) ad campaign in two markets. The MP&G logo is for tuneup services ARCO has been offering in Boston and Los Angeles. ''It's difficult (and expensive) for a dealer to be an expert in all areas of car maintenance,'' Donovan says. So ARCO is planning on being an expert in just one - tuneups.
In April, the 5-cents-a-gallon federal tax on gasoline may check the steady erosion of prices, and in some states there may be new state gasoline taxes as well.
There are mixed opinions on how the federal 5-cent tax will effect prices at the pumps. ''With margins already so thin at service stations, no one's got room to absorb 5 cents,'' says Mr. Kiersted, the Texaco spokesman. He says he expects station retailers to pass the tax directly on to consumers.
But will consumers take it? Gene Kinney, editor of the Oil and Gas Journal published in Tulsa, Okla., doesn't think so. ''There will be an effort to pass it through. Every marketer in his right mind will try it. But he'll probably fail.''
Mr. Kinney says retailers tried to raise prices four or five times in 1982, but were never successful. The tax, he says, will be shared by three levels of trade: the producer, the refiner, and the retailer. ''But because of competition , retailers haven't been able make price increases stick, so I'm skeptical about this one.''
How long will price decreases continue? The AAA spokesman says they will come down ''another nickel or so by the end of the summer.'' Ms. Lundberg thinks summer is too far away to accurately say. Others are waiting for OPEC's next move.
Pump prices slipping since last summer
(Average nationwide gasoline price per gallon*) July '82 $1.30 August 1.29 September 1.27 October 1.26 November 1.25 December 1.23 January '83 1.20 February 1.15
* Rounded to nearest cent Source: Lundberg Letter