Gasoline Kings

Why the heck are Humboldt County’s fuel prices so high?



Not just any city gets name-dropped in press releases from AAA. No, to earn a mention from the American Automobile Association your best bet is to have extremely high or extremely low gas prices. And when it comes to high prices, no city shines quite like Eureka.

AAA, the collection of regional auto clubs known for rescuing you from flat tires and keys locked in your car, issues a monthly "Fuel Gauge Report" on trends in the gasoline market. Last month's report from our regional AAA club happily announced, "Gas Prices Are Finally Falling," which I think we'll all agree was welcome news. But down in the seventh paragraph of this good-news punchbowl was the following turd:

"Of all the metro areas in Northern California where gas prices are tracked by AAA, Eureka has the highest average price at $4.32" per gallon. Then, twisting the knife: "This is also the highest price in the lower 48 states."

That's right: most expensive gas in the continental United States. Granted, AAA doesn't monitor the isolated little two-pump stations scattered along our nation's desolate roadways; some Death Valley extortionist is probably charging his customers six bucks a gallon. But when it comes to metro areas -- the places where humans have agreed to settle in groups -- Eureka takes the cake.

This probably isn't news to most locals. For years now, through the ups and downs in the crude oil market, the political upheaval in oil-producing Middle Eastern countries, BP's Deepwater Horizon spill and all those chants of "drill, baby, drill," our region's position atop the leaderboard has been dominant. The high prices aren't limited to Eureka; they extend with remarkable uniformity throughout much of Humboldt and Del Norte counties.

Since July 2008, when the average national gas price hit a record of $4.11 per gallon (and local stations were flirting with the five-dollar mark) only remote, tourist-laden Tahoe City (elevation 6,250 ft.) has regularly challenged Eureka's high-price crown in regional AAA reports, losing far more often than not.

Remoteness is one of the explanations you'll hear for high local gas prices. This explanation happens to be correct, for what it's worth. There are other correct explanations, too. When you really start looking into it, the factors that influence our price at the pump are numerous, complicated and often secretive: Many phone calls for this article went unreturned. The people who did answer were often defensive and evasive. One gasoline retail executive abruptly hung up on us after refusing to answer any questions.

Attentive local travelers have already figured out that distribution costs can't explain everything. A road trip in most any direction will reveal as much. Consider this: Almost all gasoline sold in Humboldt and Del Norte counties comes from the big, paint-flaking, Chevron-owned terminal that sits behind the Bayshore Mall in Eureka. The fuel has been converted from crude at Bay Area refineries and then shipped up here in tankers or barges. From the terminal it gets hauled in tanker trucks to nearby stations and ones as far away as Crescent City and the tiny riverside town of Hiouchi on twisty Highway 199. You might expect prices to be higher the farther you get from the terminal, but that's often not the case.

One day last week, almost every station in Eureka, Arcata, Fortuna and McKinleyville was selling regular unleaded for either $3.97 or $3.99 per gallon. (More on this lockstep pricing later.) If you'd driven 85 miles north of the Chevron terminal to Crescent City you'd have found gas -- trucked from Eureka -- selling for the same amount. And if you'd kept driving, heading northeast on 199 toward Grants Pass, Ore., you'd have found the Hiouchi Chevron selling regular for $3.99 per gallon. That's exactly the same price that was being charged at the Eureka Chevron, nearly 100 miles south, just seven-tenths of a mile from the company terminal.



So what gives? Even local retailers don't fully understand the calculus that influences retail pricing.

On an overcast morning late last month, Gurpreet Sohal stood behind the counter of the star-spangled Patriot gas station and convenience store on the corner of Fourth and R streets in Eureka. A calm man with a round face, short black hair and a mellifluous accent from his native India, Sohal co-owns a different Patriot station -- the one out by itself on Myrtle Avenue -- but he takes turns managing this one with his in-laws.

Leaning on the counter, Sohal was surrounded by vices in shiny labels. The wall behind him was stocked floor-to-ceiling with alcohol bottles, cigarette boxes and hockey puck cans of chewing tobacco. On his right, next to the register, stood racks filled with road maps and bright-colored Bic lighters. On the counter to his left, hard candy glistened in cardboard boxes and 5-hour Energy bottles were stacked in formation on a three-tiered display. Even beneath him, inside a glass case, rolls of lottery scratchers cried out for attention. Standing out from this sea of packaging, about a dozen ripe bananas lay, each in its own slot, in a blue plastic tray meant to hold Nestle ice cream bars.

Selling this stuff is how gas station owners pay the bills, Sohal said. A bottle of Diet Coke, a Snickers bar, a bag of Doritos -- Sohal and his family make about 25 percent in profits selling those products. "Cigarettes, it's less -- 10, 15 percent," he added. And gasoline? The profit margin is small -- roughly 25 cents per gallon, on average -- and sometimes it disappears completely.

Both of the family's businesses sell unbranded gasoline, meaning it doesn't have the proprietary additives that get injected into Chevron, 76 and Shell fuels. They get gas deliveries once a week, give or take, from Renner Petroleum, a locally owned hauling company (or "jobber," in industry speak) that acts as a middleman between station owners and the oil-producing megacorporations.

Sohal said he's almost as confused as consumers about how the system works. On road trips south he's seen Willits stations selling gas for 20 cents per gallon less than his own cost -- not what he's selling it for but what he's paying Renner. "I don't know why," Sohal said. "I don't know that answer either."

It's a common misconception locally that Renner is the only company that delivers gasoline to area retailers. In fact, there are two local jobbers and several from out of the area. The other local one, Big Oil & Tire, is owned by Richard Pomrehn of Arcata, who also owns most of the 76 stations in the county. Neither Pomrehn nor his accounts manager returned a steady stream of phone calls.

"It's kind of sad that there are only two of us left locally," said Truman Renner, son of Renner Petroleum owner Michael Renner. His company delivers unbranded gasoline to local stations while Big Oil and Tire delivers branded gas to area 76 stations.

Five of the Chevron stations here, meanwhile, get gas from their jobber/owner, Redwood Oil Co. of Rohnert Park, which owns a chain of 20 Chevron-branded gas stations, each with its own Redwood Market convenience store and most offering surprisingly tasty Mexican food from Aztec Grill. The company hires truckers from the Bay Area to deliver fuel to here.  It doesn't deliver to other stations, according to the company's chief financial officer, Daniel Hopley. Smaller jobbers, such as Moore Fuel in Fortuna and Apex North in Garberville, mostly deliver directly to consumers.

Molly Cook manages the Bear River Pump & Play, a gas station/tribal casino near Loleta that's owned by the Bear River Band of the Rohnerville Rancheria. Before taking the job, Cook owned and operated the Hydesville Mitey Mart, a little two-pump station and mini-mart off state Route 36. Back then she always purchased gas through Renner, but these days she shops around -- and jobbers from the Bay Area, Sacramento and Crescent City make that easy. "I get phone calls every morning at 7 o'clock, seven days a week," Cook said. She checks the levels in her tanks, selects the lowest bidder and places an order. "Right now we're buying out of the Bay Area because it's less expensive than buying local."

Bay Area jobbers, rather than shipping the gasoline up on a barge, truck it north on Highway 101. One such jobber is Thompson & Harvey Transportation. Co-owner Tom Thompson told the Journal that his drivers make the trip to Humboldt County almost daily. Sometimes, he said, Renner hires them to deliver fuel to Renner's customers. And Renner also sends its own drivers to the Bay Area and back, but the trip is not cheap.

Here's why: Northern Humboldt County is about an hour too far from the Bay Area for truck drivers to make a round-trip in a single day. The California Labor Board requires all workers to take a half-hour lunch break after five hours of work and another 10-minute rest period every four hours. "If we were [coming from], say, even the Garberville area we could make the turn to be able to truck it out of the Bay Area [in a single day]," Renner said. Instead, drivers have to sleep over before turning around.

Without the added expense of these two-day trips, trucked gas would be notably cheaper, which would put more competitive pressure on barged gas. Are local jobbers profiting from this competitive advantage? Thompson, the Bay Area jobber, seemed to think so. "It's just all what the market will bear with these guys," he said.




Another question that nags local motorists: Why do all the stations around here seem to copy each other on price? Turns out, it's because that's exactly what they do.

"In Eureka you can't create your own price," Sohal said. "You have to follow the big fish."

The trendsetter, according to Sohal, Cook and other local station managers, is Humboldt/Peninsula Petroleum. Humboldt Petroleum was locally owned until 2005 when it was sold to Peninsula Petroleum, a Redwood City-based company owned by M.J. Castelo and famed Indy racers Mario and Michael Andretti. The company owns 15 stations in Humboldt County including all the Shell and Performance Fuel locations. Castelo, the non-racing co-owner, is the guy who hung up on us after refusing to answer any questions.

Sohal typically checks the price of regular unleaded at the Performance Fuel station up the street each morning and then matches it. Cook also bases her price off of Humboldt/Peninsula's street price, but she undercuts it by four or five cents. (We'll explain how she can do that below.)

In other towns, consumers can bargain shop for gas. In San Francisco, for example, the spread last week on a gallon of regular was nearly a dollar -- from $3.69 at an independent station in the Castro District to $4.59 at a Shell near South Beach. In Willits, retailers have been fighting a price war ever since Safeway and Arco (which doesn't take credit cards) moved in, cutting independent profits to the bone. Carrie Lundborg, the office manager at the independent Brown's Corner station on the south end of Willits, said she always had the cheapest prices in town until Arco moved in and undercut her by 30 cents per gallon, which it can do because of its corporate sugar-daddy (Arco is owned by BP, the third-largest oil company in the world).

The variety of prices in most markets can be attributed largely to competition. The stations in Crescent City and Hiouchi have to compete with cheaper gas in Oregon, for example. But rent costs and sales volume also play a role, according to Hopley, the chief financial operator of Redwood Oil Co. Rents in San Francisco are not only expensive relative to, well, just about anywhere else, they're also highly variable depending on the neighborhood. Rents in Humboldt County, by comparison, are fairly consistent across the board.

As for competition, there are bargain finds here and there in Humboldt. The two tribe-owned stations, Bear River Pump & Play and Blue Lake Casino's Play Station 777, sell gas for a few cents cheaper than the going rate. Cook sometimes orders gas from Oregon, which is not required to meet the standards set by the California Air Resources Board. Tribes need not comply with those standards. Tribal casinos also aren't required to charge all state and federal taxes, although a Bear River spokesperson said that the tribe does.

Calls to the Blue Lake Casino were not returned.

The only other spots to find cheap(er) gas are members-only stations like Costco and Renner's card lock pumps. Renner avoids the swipe fees charged by major credit cards, which can add roughly 7 cents per gallon to the price of gas, according to a report from the National Association of Convenience Stores.

Costco has other competitive advantages. It has long-term supply contracts with wholesalers, it sells massive volumes of gasoline, and it makes next to nothing in gas profits on purpose, according to San Diego attorney Timothy Cohelan, who has spent more than a decade litigating class-action suits against California oil companies over alleged collusion, price fixing and profiteering. The pumps at Costco are mainly there to lure customers into the warehouse, Cohelan said.

But Costco's not the only place that can benefit by increased sales volume. As with any commodity, you get a discount on gas when you buy in bulk, and in most markets that's exactly what allows some retailers to undercut their competition. Drop prices by a nickel per gallon and you'll make less on each fill-up, but you could potentially make more in the long run by stealing your competitors' customers and getting bulk discounts from your supplier.

In larger metro areas, many stations go through 20,000 gallons of fuel or more per day, according to Truman Renner. Local retailers are fighting over a much smaller pool of demand. Molly Cook, the manager at Bear River Pump & Play, said her station, which sits all alone on a pastoral hill above Loleta, sells about 8,500 gallons of unleaded every day. Sohal's stations are in the middle of Eureka, and yet it takes them about a week each to go through 8,500 gallons.

Why doesn't he drop prices to boost sales volume? We asked him what would happen if he undercut the competition by five cents per gallon. He said there's simply no point. If any of the local stations tried it, "then everyone starts losing money, and no one can afford that." Small, independent stations like his are just trying to make their 25 cents per gallon, he said, and as long as Humboldt/Peninsula's price allows them to hit that target there's no incentive to deviate.

Whether this philosophy is a realist-minded method of self-preservation or just timid obedience, it seems to be the consensus approach. The so-called "big fish" -- Big Oil & Tire, Humboldt Petroleum and Redwood Oil -- own fewer than half of the county's 85 gas stations, so the lack of competitive pricing, at least on the retail level, appears to be voluntary, the result of a collective business strategy (or lack thereof).

On the other hand, it makes sense that station owners are loath to jeopardize their slim gas profits. Periodically during our conversation with Sohal, a customer would walk through the front door. One, a haggard-looking fellow with five days of salt-and-pepper stubble, spent about seven seconds scanning the shelves before demanding, "You have any matches?"

"No," Sohal responded. The man bolted out the door, muttering "Liar" on his way through.

A few minutes later another man swung open the front door and stepped directly to the counter, asking for a pack of American Spirits, yellow. Sohal grabbed the pack from the shelf behind him and rang it up: $6.58. With his 10-15 percent profit margin on cigarettes, the station just earned somewhere between 66 and 99 cents.

"It's a job," Sohal said after the man left. "It's OK money, but it's just a job. You're not gonna be rich." Not much of the money coming in flows from the gas pumps, he said. The oil market is volatile, and sometimes he goes weeks without making a profit from gasoline sales. Just that morning he'd purchased 8,500 gallons from Renner to refill his tanks. His cost, he said, was $4 per gallon. Since then, in a matter of just a couple hours, wholesale prices had dropped by almost 20 cents. (At the distributor level, prices on gasoline can change five or six times a day.) Now he was stuck with a week's worth of that costly gas.

"It's just a gamble," Sohal said of selling gas. "Like you go to a casino. Sometimes you win, sometimes you don't." He tries to average 25 cents per gallon in profit. "Sometimes you make 30, sometimes 10. But average on a year it should come to 25 cents." Station owners in Del Norte and Mendocino counties said that's about what they make, too. Sohal said that margin gives station owners enough to make a living, provided nothing catastrophic happens.

In May, something did. An inspection at the Fourth Street station revealed that an underground storage tank was leaking and needed to be replaced, which would cost $55,000. Sohal said the company that sold the tank to his family had since gone out of business. The family wanted to get rid of the tanks entirely -- shut down the gas station and expand the convenience store -- but they learned that removal of all the tanks and pumps would be even more expensive than fixing them. Renner ended up fronting Sohal's family the money to replace the underground tank, and now they're making monthly payments on the debt.




So if station owners are only making a quarter from each gallon of gas, where does the rest go? According to the Natural Resources Defense Council, 46 percent of what consumers spend at the pump goes to production costs; another 15 percent pays for refining; 10 percent goes toward taxes (likely more than that in California, since we have the third highest combined federal, state and local gasoline tax rate in the country at 67 cents per gallon); and roughly five percent goes toward distribution, marketing and retail.

Math whizzes may have noticed that we didn't reach 100 percent. According to the NRDC, 24 cents of every dollar spent on gasoline last year went to oil company profits. And for the major oil companies, last year was an unprecedented bell-ringer: $137 billion in profits, a 71 percent improvement on 2010's record haul of $80 billion. Of the 12 companies in the world with the highest gross revenues last year, eight were oil and gas companies.

According to Timothy Cohelan, the San Diego attorney who's battled these mega-corporations in court, this is where the gas game in California is truly rigged -- and has been since the mid-1990s when the California Air Resources Board mandated that all stations in the state sell a reformulated blend of gasoline designed to burn cleaner. The goal -- decreased emissions -- was noble, but the mandate had some unintended side effects.

For one thing, many smaller, independently owned refineries had trouble finding the investment capital necessary to upgrade their plants. Some shut down; others sold out to the major brands. A few petitioned the state for a small-refinery exemption to the new law, but the major oil companies fought that and won. "So a lot of refiners that kept the lid on prices at the margins ... were now out of play," Cohelan said in a recent interview.

Next, the major oil refiners went on a merger spree. Then, the remaining companies entered into a series of exchange agreements with one another, allowing them to swap millions of barrels of oil per day to reach markets where they otherwise wouldn't have access. Renner said Chevron does this at the Eureka terminal, allowing companies such as Beacon, Valero and Shell to sell their fuel here in exchange for getting their own gas into markets such as Reno/Sparks, Nev.

These exchange agreements, combined with the market data transparency ushered in by the Internet, have allowed major oil companies in California to do two things, Cohelan argues: stop fighting among each other for market share, and carefully match total statewide production to demand. Smaller, unbranded marketers used to depend on selling the excess gas from refineries, which helped keep overall prices down. After the major companies started cooperating, Cohelan says, the leftovers disappeared.

"Thereafter, California refiners rearranged supply to prevent gasoline from getting to independent marketers at competitive prices," Cohelan wrote in the San Diego County Bar Association newsletter. Thanks to the fuel specifications enforced by the California Air Resources Board, drivers across the state had become a captive market, and now the major oil companies had a near-total lock on supply -- the perfect setup for price gouging, in Cohelan's estimation.

He took this argument to court in a pair of lawsuits. In the first, called Aguilar vs. Arco, a judge issued a summary judgment dismissing the suit and, upon appeal to the state's Supreme Court, that judgment was affirmed.

Undaunted, he followed that case with a class action lawsuit against the state's 11 major oil refiners, accusing them of colluding to raise the price of gasoline in violation of the Sherman Antitrust Act.

After years of legal wrangling, dismissals and appeals, a Ninth Circuit panel decided in January of last year that Cohelan didn't have a viable claim under the Sherman Act. It did so, Cohelan said, without even considering the evidence. (The court cited the controversial precedent of Bell Atlantic Corp. vs. Twombly, a 2007 U.S. Supreme Court case that has made it more difficult to bring antitrust cases to trial.) Meanwhile, the market power of these companies has made oil even more valuable as a commodity, sending the price of crude higher and giving the oil industry record profits, Cohelan said.

"A lot of these integrated companies, it doesn't matter where they put the dividing line for profit," he said. "The profit between the cost of refining the crude and what their wholesale price is, it's huge."




Economists will tell you that healthy capitalism depends on healthy competition. Looking at the gasoline market in Humboldt County, this is what we find:

On the retail level, station owners seem to have opted out of competition entirely, partly out of deference to the "big fish" but mostly because there are only scraps to be had this far down on the food chain. Cohelan points out that oil companies realized years ago that there's no longer much money to be made at the retail level, and so they've been systematically divesting of gas station ownership.

"The refiners now know that the big money is in the wholesale price, and you leave a couple of bucks on the table for the poor dealer who's selling Twinkies or a car wash," he said.

On the distribution level, only two local jobbers remain, and according to Truman Renner they don't compete with each other for contracts. Meanwhile, competitors from outside the county are handicapped by the costs of long-distance transportation.

And as for the top of the supply chain, Cohelan said simply, "Competition died. I watched it die. I watched it on the gurney in the E.R. I lived it for 10 years."

Last Friday, after months of declines, global oil markets posted their fourth-largest daily gain on record thanks to good news on the European debt crisis. News reports were filled with analysis of hedge funds and other speculators. Earlier in the week analysts were predicting that gas prices might fall below three dollars a gallon before summer is out. Now they're saying prices might be headed back up.

Either way, it's a safe bet that Eureka will find a spot in many more AAA press releases.

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