On a recent Wednesday, 72-year-old veterinarian Charles Hendricks filled up his Mercury Grand Marquis at a Chevron in west Anaheim. On the other end of town, 22-year-old sandwich store manager Ryan Ketchum gassed up his Nissan Sentra at a Chevron in Anaheim Hills.
Both men bought regular gasoline. Both pumped the gas themselves. But there was one important difference: Hendricks paid $2.399 a gallon, whereas Ketchum paid $2.539 — 14 cents more a gallon for the same Chevron gas.
Such price variations may seem odd, but they are not unique to Anaheim. On any given day, in any major U.S. city, a single brand of gasoline will sell for a wide range of prices even when the cost to make and deliver the fuel is the same.
The primary culprit is zone pricing, a secret and pervasive oil company strategy to boost profits by charging dealers different amounts for fuel based on traffic volume, station amenities, nearby household incomes, the strength of competitors and other factors.
It's a controversial strategy, but the courts have thus far deemed it legal, and the Federal Trade Commission recently said the effect on consumers was ambiguous because some customers got hurt by higher prices while others benefited from lower ones.
To be sure, other industries vary prices by area too. Supermarkets, for instance, price the same brand of bread or cheese differently in different neighborhoods. But gasoline price patterns provoke a response that bread can't match, partly because other commodities don't fluctuate as wildly as gasoline does and their prices aren't posted by the side of the road.
Oil companies say the practice allows them to adapt to local market conditions by, for example, lowering prices to dealers who face stiff competition from high-volume sellers such as Costco Wholesale Corp.
Most California gasoline retailers, however, declined to discuss their pricing practices, referring questions to industry groups.
"It is a perfectly acceptable form of pricing," said Joseph Sparano, president of the Western States Petroleum Assn., a Sacramento-based industry trade group. Zone pricing, he said, "is a way for companies to price fairly in different areas."
Said Trilby Lundberg, who produces the widely quoted Lundberg Survey of gasoline prices: "The flip side is that locational pricing allows for prices to be lower in some areas than others."
Such explanations haven't appeased consumer groups, lawmakers and state government critics such as Connecticut Atty. Gen. Richard Blumenthal, who has tried to outlaw the pricing method, calling it "invisible and insidious."
"Zone pricing, on paper, sounds reasonable; in practice, it's despicable," said Michael Shames, executive director of the Utility Consumers' Action Network, a San Diego group that has tracked regional gasoline prices for almost a decade. "It undercuts price competition."
The issue has particular resonance with consumers in California, where retail fuel prices are among the nation's highest and annual gasoline consumption outpaces demand in all but Japan and the United States as a whole.
Quantifying the effects of gasoline zone pricing on consumers, however, remains a difficult task. That's partly because the mechanics of the strategy are kept secret and partly because the effects on consumers — in terms of cents per gallon — are constantly changing.
In addition, zone pricing kicks in at the end of a chain of complex transactions that take place between the oil well and the corner gas station.
The largest chunk of the price of gasoline, about 50%, is a reflection of the cost of crude oil, the raw material used by refineries to make fuel. Experts say that for every $1 jump in the cost of a 42-gallon barrel of crude, there will be a 2.5-cent-per-gallon increase in gasoline prices.