Gouging? Gas stations are making less
Gulf Oil CEO Petrowski says prices may be higher but margins are down. Plus: his plans to offer pre-paid gas and price caps.
By Telis Demos, FORTUNE reporter

NEW YORK (FORTUNE) - Joe Petrowski wrote his Harvard thesis about the business of gas stations. Good thing - because last year, after 29 years as an energy trader and consultant, he took the CEO job at Gulf Oil, running 2,500 of them from Ohio to Maine. Recently, Petrowski, 52, made headlines with plans to release debit cards, starting October 1, that allow Gulf customers to pre-pay for their gas at the current market price, shielding them from further increases. And for Gulf's credit-card holders, he's proposed to cap the price they pay in exchange for a small per-gallon fee, starting in early 2007. With all the talk of price-gouging by gas retailers, we had to wonder: Is Petrowski saintly, crazy, or brilliant? FORTUNE's Telis Demos called his Boston offices to find out.

Running a big chain of gas stations must make you an unpopular guy.

Gulf Oil CEO Joe Petrowski
Gulf Oil CEO Joe Petrowski

One of the things I find astonishing, and unnerving, is that we seem to have this eternal search for price-gouging on the street. And I can say, unequivocally, the overwhelming fact on the retail side is that the margin being made by the average retailer is less than it was a year ago, and less than it was five years ago.

How is that possible?

Even as gas goes up a dollar, the retailer's still paying 2.5% to a credit card company. Nobody pays cash anymore. With very high prices you're also losing sales of premium-grade gasoline, and that's generally where retailers made more of their money. And as we all know, people are jumping the curb for a 3-cent price difference. They'll go to Johnny's Gas rather than Gulf.

Is that the thinking behind the fixed-price cards and price-cap options?

If gasoline is being increasingly viewed as a commodity, what else can we do that can differentiate us, create loyalty? We sat around and thought, given the savings that commercial airline and railroads get with the ability to fix the price of gasoline, this is an option that consumers might value - and help distinguish us.

With the pre-paid card, once you've chosen your price, do you have to pay for all the gas up front?

We'll probably ask somewhere from 75 cents to a dollar per gallon up front, because we have to make sure we don't have a credit problem. If you lock it in at $2.50, and we ask for nothing, and the market goes to $1.50, we lose because we've hedged it at $2.50. The balance is paid when you pick up the gas.

For Gulf's credit-card users, how will you determine the price cap?

The ceiling price will be slightly above the day's market. If the market is currently $2.50, it will be about $2.60 or $2.70 cap. We're thinking the cap will last for about 3 to 6 months, maximum. When you go to the pump with that card, you'll either get the cap price or the market price, depending on which is cheaper.

How much will it cost to use the cap?

We're trying to price it 15 to 20 cents a gallon. ...(Consumers) wouldn't in the end save any money until it was 15 to 20 cents higher than that. But you don't have to use the card.

So now if prices start falling, will Gulf lose money?

Retailers make more money if prices are consistently going down, than if going up. Most people, including my wife, did not know that. It is harder for us to raise our margins if the wholesale prices are going up.

Even if lots of people take you up on the caps?

We buy physical boatloads from refineries every day. As long as we know what we've sold, we hedge it. If we see that we've bought more in the last three hours, then we sell futures. But if we've sold more, we buy futures. From a risk management standpoint, it's a piece of cake once you get over the tax aspects.

Do you know if other chains will be offering these options?

I've had discussions [with other companies] about this, but I don't expect a lot to come out of it.


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