Oil Majors Exiting the Gas Station Business

Here is an interesting graphic from the WSJ depicting the shrinking margins for gas stations due to the rising cost of oil:

Graphic courtesy of the WSJ

Now just imagine how much gasoline would cost if margins had stayed constant.

The graphic comes from an article discussing how Conoco Phillips (COP) is selling off its remaining gas stations in the U.S., and how other big oil companies have exited the business as well.

From the WSJ:

ConocoPhillips is expected to sell the remainder of its 600 company-owned gasoline stations to closely held PetroSun West LLC for $800 million, exiting a business undergoing significant change.

The sale is part of oil companies' efforts to flee low-margin U.S. retail-gasoline sales and focus on finding new supplies of crude oil. Houston-based ConocoPhillips will continue to refine oil into gasoline and sell fuel on a wholesale basis to stations. Its brands -- Conoco, 76 and Phillips 66 -- will remain part of the U.S. driving landscape.

Retail gasoline-sales are undergoing dramatic change. Giants such as ConocoPhillips and Exxon Mobil Corp. (XOM) are exiting, and grocery chains Kroger Corp. (KR) and Wal-Mart Stores Inc. (WMT) use fuel sales to lure shoppers. BP PLC (BP) intends to sell its company-owned U.S. stations by next year.

Earlier this year, gasoline retailers experienced some of the worst profit margins on record.

While it may sound strange that retailers are struggling to make money selling gas, it makes perfect sense when you realize that gas prices have increased by about 42% ($2.76 to $3.91) over the past year, while oil prices have increased by about 64% ($70 to $115.00). Mind you I'm not claiming that there should be a 1:1 relationship between the % increase in oil prices to the % increase in gas prices, however when the refiners cost of raw goods (oil) is increasing faster than the prices the retailers are charging the retailer is going to get squeezed.

Still it is truly a strange thing when both consumers and gas retailers are being hurt by rising gas prices whilst the oil companies make out like gangbusters, which I suppose is really more of a commentary on how it's often better to be the supplier than a retailer/reseller in a particular economic ecosystem.

You can read more here.

Source

The WSJ:"Conoco Plans Deal To Sell Rest of Its Gas Stations" --- Russell Gold, August 27, 2008.

Comments

[epoch]

Maybe their exiting more than just the retail gas station business?

[Markham]

I think it's a situation where in order to sell gas profitably they have to more or less become convenience store operators and/or run a car wash, provide oil changes, etc, and it's just too much of a distraction from their core business/not worth the investment.

Despite living in a fairly affluent area there have been multiple gas station closings near me lately, and it seems like the ones that survive are the ones that not only have fairly extensive convenience store operations that also sell fresh sandwiches (and even wine) they also have car washes too.

It's not that different a model than my local Safeway: "sell gas and hope to break even, while making our profits from other things".


Thanks for reading.


-M

[The Fitzman]

As you say, American oil majors are wise to exit the retail gasoline business. Too much effort for too little margin. Other reasons are the majors see a future in which gasoline prices will rise dramatically. The political and financial pressure on retail gasoline sales will be tremendous. Longer term, if the US does not adopt an energy policy:

thefitzman.blogspot.co...

it is quite possible the government/military will take control of gasoline distribution and rationing. this is the reality of a peak oil future where worldwide oil supply wont keep up with worldwide oil demand. for a country that uses 25% of worldwide oil production, has on 3% of worldwide oil reserves, imports 70% of its oil, and is fighting wars to get access to future oil, this is a very likely outcome. the ONLY solution is a comprehensive, long-term, strategic energy policy like the one outlined above. don't hold your breath.

[Mmarrkk]

epoch: what's your point? what else might they exit? I'd love to see many of the big oil's exit the refining end of the business too! But they probably won't. Or at least, spin off the refining side. That's what Marathon is talking about.

[Dan S1]

This situation is the same throughout the economy. Namely, that the producer of the raw material is making all the margin, but the retailer of the finished product is getting squeezed. What this tells us is that the consumer's income is increasing at a lower rate than inflation, which causes these margin squeezes.

Today, you only want to be the producer or at the front of the supply chain and not at the back as the people up at the front took all the profit and you at the back are left with all the low margins and consumers complaining that you're the one making money with these high prices when you are not.

Honestly, I saw this coming back in 2003, but I do not know how to profit from the information I know.

I agree with the oil majors that the relatively high oil prices are here to stay as I would now expect an extreme low to be around $45 to $50/bbl. Forget about $1.50/gal gas going forward, even if we go into recession in a couple years, but we can see $2 a gal gas again in low tax states in the upcoming recession. The money a person spends for fuel means that they have less money to spend on other things like cigs, lotto tickets, soda, candy, alcohol, car washes, etc, so it hurts all parts of the convenience store business as well.

[Markham]

Dan your point on higher gas prices impacting the convenience store business is a solid one, I recall back in 98-'01 I would go to my local convenience store and fill-up my tank, buy the NY Times, a Gallon of Milk and Donuts for my girlfriend and I for under $20.00.

Nowadays it's close to $70.00 for the Gas, the Milk is a LOT more expensive, but hey, at least the Donuts are close to the same price.

-M

[jegan ;-)]

Re: Epoch's comment ... It was reported awhile back that the large integrated oil companies were buying back shares at a greater rate and neglecting new drilling and exploring. Some investors seem to have mistaken the buy-backs as a positive thing, when it would seem that what they are doing is reducing their growth rate.

jegan ;-)