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Gasoline Prices Set According to Regional Zones


Those gas prices David mentioned hit another record last week. The Energy Department reports today that the national average surged more than 18 cents to $2.55 a gallon. Jason Toewes has been watching the numbers go up. He's co-founder of the Web site Gasbuddy.com. He collects information on prices from all across the country.

Mr. JASON TOEWES (Co-founder, Gasbuddy.com): We're seeing some of the cheapest prices in Utah at 2.34 per gallon. Some of the highest prices are in California at 2.74 per gallon. We see a lot of variations in gas prices around the country. In any given metro area, there's usually at least a 25- or 30-cent per-gallon range between the high and the low price. In some areas like California, we even see 50 or 60 cents per gallon within the same metro area.

NORRIS: Fifty or 60 cents a gallon. Well, that's quite a bit and something drivers may notice cruising down the highway. I certainly did on a recent trip from Baltimore to Calvert County, Maryland. Along US Route 301, gas prices spiked and dipped like a roller coaster. Gas stations charged vastly different prices for the same product even when sold by the same company. To find out why prices fluctuate so wildly, we're joined by Elizabeth Douglass. She covers the oil and gas industry for the Los Angeles Times.

Thanks for coming in to talk to us.

Ms. ELIZABETH DOUGLASS (Los Angeles Times): Sure.

NORRIS: Now, Elizabeth, I understand these variations can be explained by something called zone pricing. Help us understand that.

Ms. DOUGLASS: That's a system that's used nationwide, and probably worldwide, and it's primarily in the control of the oil companies.

NORRIS: And is this something that's done all across the country?

Ms. DOUGLASS: Yes, it's very, very common. There's a specific company that almost all of the major brands use. And this company goes out and it'll map out a whole city, for example. And if it's, say, Chevron, it'll make not of where every single Chevron is, and it will see which Chevrons has a Costco or some other lower-cost fuel provider nearby and it will also see how many Shells and Arcos and other kinds of brands are nearby. And then it will ask Chevron, you know, `How do you want to price based on these characteristics?'

NORRIS: Well, this kind of thing happens in other industries. A gallon of milk, for instance, costs much more in a swanky neighborhood than it might, say, in the ghetto. So what's the difference with gas?

Ms. DOUGLASS: Well, gasoline is psychologically much more intensely viewed; we see the prices by the side of the road. But also, there's a bit of market power involved. We have fewer players. We don't think of there being a milk cartel or some other commodity like that. But we know oil, for example, is largely controlled by an oil cartel.

NORRIS: You could argue that this is a form of redlining. Is this legal?

Ms. DOUGLASS: It's very legal, at least according to the courts so far. They have determined, in economic studies, that it is ambiguous as to whether there's an overall benefit or an overall hurt to consumers. There are some areas, of course, that pay extra for their gasoline, and there are some areas that might bet a better deal, for example, somewhere around a Costco. And so they have determined that either the discrepancy is so fleeting that you cannot build a case of price discrimination, or it is ambiguous because some benefit and some lose.

NORRIS: Elizabeth, I have one last question for you. The price that's set by the gas company, do the dealers have to follow that? Is there any way that they can--if the guy across the street is selling gas for 10 cents cheaper, he has no play in the price.

Ms. DOUGLASS: Well, he does have some control, but what would happen is his profit would be squeezed. Say, the guy across the street is charging $2 a gallon. He might be getting his gasoline for $1.80 a gallon from the--say, it's Shell. And the guy across the street is Chevron, and he's paying $1.95 for his fuel. If he puts his price at $2, he's only making 5 cents a gallon.

More than likely, he'll say, `I have to pay for my employees and my property taxes and all the other things, and I need an 8-cent profit to do that,' so he might keep his price 8 cents above the wholesale price and suffer the loss of business because of that.

NORRIS: And does this mean that gas stations have to look for profit in other ways, selling milk and Twinkies and a hot cup of coffee?

Ms. DOUGLASS: Yes, indeed. The days are long gone when dealers make very much money on gasoline.

NORRIS: Elizabeth Douglas, thanks for coming in to talk to us.

Ms. DOUGLASS: Thanks a lot.

NORRIS: Elizabeth Douglass covers the oil and gas industry for the Los Angeles Times. Transcript provided by NPR, Copyright NPR.