gas-stations.jpgThe other day, I showed you how the gas stations and mortgage brokerages have a lot in common.  You can read it here.  As promised, there is more to the story between Big Moe’s and BP. 

Recall that Big Moe’s is just across the street from BP.  Since Big Moe’s doesn’t have much overhead, he is buying gas from BP wholesale and selling it to consumers five cents cheaper than the BP located just across the street.  As the customer, you are happy because you get cheaper gas.  Big Moe’s is happy because they are a making a few cents profit.  BP is happy because even though they didn’t sell the gas to you directly, they indirectly made money through Big Moe’s selling it to you.

This goes one awhile and everyone seems content.   One day, a new gas station opens up on the same street as Big Moe’s and BP.  This new gas station is Citgo.  Citgo is just as big of a company as BP with fancy restrooms and kids play areas.  Both Citgo and BP are still five cents more expensive than Big Moe’s.

Citgo decides that they have refined too much gas and they too call up Big Moe’s and tell them that they can sell gas wholesale cheaper than BP.  Being an astute businessman, Big Moe’s takes Citgo up on their offer.  After all, his customers don’t care if it is BP or Citgo gas.  All they care about is getting gas five cents cheaper than going to BP or Citgo and Big Moe’s can make a little more money.   Everyone is happy.  Except BP that is…  Not only is Big Moe’s undercutting BP, but they also lost money to Citgo since Big Moe’s is no longer exclusively using BP for their wholesale gas.

BP starts noticing fewer and fewer cars showing up while Big Moe’s seems to be doing pretty well and Citgo is also making money.  BP decides that the only way they can compete is to undercut Citgo’s wholesale price.  BP drops their wholesale gas prices and approach Big Moe’s with their new wholesale price.  Of course, Big Moe’s agrees to the lower price and he is making more money and still selling gas cheaper than either BP or Citgo.  Now Citgo is pissed at Big Moe’s as he is getting even more business and has no loyalty to either BP or Citgo.  Citgo and BP are essentially fighting each other while Big Moe’s is laughing all the way to the bank.

One day, the CEO of BP calls for a meeting with the CEO of Citgo.  They discuss lowering their gas prices to compete with Big Moe’s, but it becomes apparent that they can’t afford to because they are also sponsoring the local NASCAR driver.   They also just bought a bunch of corporate jets, not to mention their big executive salaries.   Their cost are just too high.  They are really upset that they started wholesaling gas just to make a little extra money, but didn’t expect some rinky dink gas station like Big Moe’s to steal all their market share.  Big Moe’s started off with about 5% market share and quickly grew to almost 60% in no time.  This is unacceptable the CEOs thought.  Both CEOs then decide they have an idea.  They call up their friend who happens to be the Mayor of the town.  We will call him Barney Frank, I mean Fife.  They tell Barney that Big Moe’s is gouging customers and that theses small gas stations need to be licensed better.  They also donated a lot of money to his campaign, so Mayor Fife owes them one.

Being the great Mayor that he is, Mr. Fife imposes a law that says gas stations that don’t refine their own gas have to disclose their profit margins to their customers.  Since gas is so complicated, these profit margins are going to be called yield spread premiums (YSP).   The YSP must be disclosed on the pump of the gas station at Big Moe’s for all consumers to see.  Mayor Fife doesn’t believe REFINERS should have to disclose their profit margins.  Refiners call their profits service release premiums (SRP).  The logic is that it would be too cumbersome for a refiner to disclose since they aren’t sure what they are going to sell the gas for at the time of refinement.

In addition, the Mayor also says that places like Big Moe’s must have their bathroom’s cleaned.  However, this portion of the law only applies to places like Big Moe’s that don’t refine their own gas.  Refiners aren’t required to follow city cleanliness laws because it would interfere with commerce of large refining gas stations.

Naturally, Big Moe’s isn’t too happy about these new laws, especially since they only apply to him and not the other gas stations on the street.  However, he didn’t have the extra money to contribute to the Mayor’s campaign, so he just chalks it up as being “politics”.  It doesn’t matter to Big Moe’s though.  He knows most of his customers are smart enough to figure out that the only thing that matters is the price of his gas, not how much profit he is making on it.  He lost a few customers when they saw he was making 1-2% profit on a gallon of gas.  Not enough to lose sleep though.

Even after all these challenges were thrown in front of Big Moe’s, his volume of gas continued to grow.  In fact, he now had a nice gas station and more amenities than both BP and Citgo.  His share of the market place grew from 10% to about 60% in no time.  He also never told BP or Citgo that he started buying gas from another refiner who was even cheaper called Shell.

To Be Continued…

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