NEWS ANALYSIS : Gas Price Freeze Shows Oil Firms Heed PR Lesson
When Iraq invaded Kuwait on Aug. 2, gasoline prices soared almost immediately. At the time, the oil industry said the rapid rise was meant to anticipate the expected higher cost of crude oil and to discourage panic buying.
But the public and some members of Congress had another word for it: profiteering.
So when allied forces launched massive air raids against Iraq on Jan. 16, Unocal Corp. and other major oil refiners tried something different. They immediately froze wholesale gasoline prices, even though almost everyone expected crude prices to soar as high as $60 a barrel.
That didn’t happen. Indeed, as crude oil prices plunged unexpectedly, the industry found itself scrambling to avoid the impression that it was locking in higher prices than the market would justify.
Still, analysts saw both decisions as signs of increased sensitivity about the oil industry’s public image.
“In a time of crisis, when the price of gasoline is hugely felt by the general public, there’s always a sense that you need to win the war at home too,” said an industry insider. “The oil industry has felt the brunt of both congressional and public criticism many times before. Maybe the industry has learned its lesson.”
Of course, oil company executives were balancing concerns about competition and profitability against their public relations worries when they formulated plans to react to war.
But an important lesson that the industry apparently has learned is that it can no longer conduct its business without taking into account a possible outcry from Congress or the public. It’s a lesson that will probably color oil company actions as long as U.S. soldiers continue to fight a war over control of the world’s biggest petroleum fields.
When the war began, oil firms were acutely aware that there would have been public relations problems galore had they raised gasoline prices, even if crude prices had skyrocketed, as everyone had expected.
The problem would only have been compounded this week, as the industry began releasing fourth-quarter earnings reports, many of which show massive profits from higher crude oil prices late last year.
“It’s not good publicly to show a huge increase in fourth-quarter earnings and to raise gas prices while there are 400,000 men and women over there battling to save their oil supplies,” said Ed Rothschild, director of energy policy for the consumer advocacy group Citizen Action in Washington.
On Tuesday, Mobil Corp., the nation’s second-largest oil company, reported a 46% increase in fourth-quarter profit. On Wednesday, Texaco Inc. reported quarterly earnings up 33.4%.
Last week’s decision to freeze prices was also based on simple economics. Demand for gasoline has fallen sharply, partly because of winter and partly because of high prices since Iraq invaded Kuwait, analysts point out. Raising prices would have hurt sales.
Ironically, the oil industry found itself on the defensive even after making its move. After surging briefly Wednesday night on after-hours markets, crude oil prices actually plunged the day after the war started, taking their biggest one-day fall in history.
As a result, companies found themselves having to explain that the freezes were not intended to keep prices artificially high.
In the following days, major oil companies, notably Exxon Corp., said they would lower wholesale gasoline prices. Many other major refiners said they would cut wholesale gasoline prices by 3 to 8 cents a gallon. On Wednesday, Chevron Corp. announced the end of its price freeze.
Many independent refiners and most retailers were expected to lower their prices as well, though such changes have been slow in appearing. Indeed, according to Trilby Lundberg, publisher of the Lundberg Survey, wholesale gasoline prices nationally dropped 2.7 to 4.3 cents a gallon from Friday to Tuesday.
In any case, the decision to freeze prices did draw praise from one industry archenemy. Sen. Joseph I. Lieberman (D-Conn.), a proponent of windfall profits taxes, called the decision to freeze “an act of corporate patriotism.”
The freezes last week were probably based on the experiences of Los Angeles-based Atlantic Richfield Co. in the weeks after the initial invasion of Kuwait in August. When gasoline prices soared then, the public outcry was so great that politicians right up to President Bush called on the industry to restrain itself.
Some members of Congress rushed to introduce bills calling for windfall profit taxes on oil. Similar legislation was resubmitted when Congress came back into session this month.
Arco was the first to take the bold step of freezing wholesale gasoline prices, and for several days in August, it was the only one doing so. Its prices were several cents a gallon lower than those of competitors.
The public responded enthusiastically. Hundreds of Arco stations ran short of gasoline. Arco officials scrambled to hire every available tanker truck to make deliveries. The company’s refineries came close to running out of fuel.
But Arco also won praise from lawmakers and others for its restraint. Not incidentally, Arco--already the West Coast’s No. 1 seller of gasoline--managed to boost its market share even more. Other oil companies eventually followed Arco’s lead.
Last week, cross-town rival Unocal Corp. was apparently determined not to get outmaneuvered a second time. Within hours of the allied assault, Unocal issued an announcement saying it would freeze prices immediately.
“The price freeze we have is simply responsible corporate governance,” Unocal Chairman Richard J. Stegemeier said.
Unocal moved more quickly than other oil companies that had contingency plans to deal with what happened after the Jan. 15 deadline for Iraq to pull out of Kuwait, one industry source said. “Every oil company had a plan for the war. . . . And if they didn’t, they were kidding themselves,” the source said.
Before going ahead with a freeze, each company had to determine how much fuel it had on hand, how high crude oil prices would spike and for how long.
Perhaps as important, oil companies had to anticipate what the competition would do. If the price of crude oil skyrocketed and others did not freeze their prices, a company could lose its shirt.
To prepare, some refiners quietly raised wholesale gasoline prices in the days and weeks leading up to the deadline. The increases in part reflected several days of crude oil price run-ups.
“Arco raised its prices about 2 cents a gallon just before it happened,” said one marketer who operates a chain of independent and Arco-branded stations. “Some other refiners raised prices 2 cents, and the independents (refiners) went wild, up 5 cents and 12 cents,” he said.
Many refiners also placed limits on the amount of gasoline sold to their customers, particularly wholesaler distributors--called “jobbers”--who in turn sell gasoline to independent service station chains. Such limits were intended to prevent panic runs on refineries, causing them to run short of fuel and contributing to price hikes.
As central as conditions in the Persian Gulf are to oil company health, industry leaders were as surprised by the timing of the war’s outbreak as everyone else.
At Arco, the war’s start found many executives out of town. “I was in Hawaii, and our management team was in different parts of the U.S.,” said George H. Babikian, president of Arco’s refining and marketing subsidiary and the driving force behind Arco’s August price freeze.
Chairman Lodwrick M. Cook was in Washington. After a series of phone meetings with other executives, Cook approved a freeze that night, Babikian recalled.
“It was a no-brainer,” he said. “I got a red-eye that night . . . and was in the office at 5:30 a.m. Thursday.” Arco’s announcement came later that morning.
OIL PRICES RISE
Futures are up 16 cents after a day of volatile trading. D4
Edging Higher Average national price per gallon, self-serve, regular unleaded gasoline. Reports for August were more frequent than usual due to the outbreak of war in the gulf. Gasoline Prices Jan. 22: $1,249, up 0.5 cent Source: American Automobile Assn.
