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Confusion at the Pumps: Big Oil's Strategy for Jacking Up Gas Prices

By Alexander Jung and

Prices at German gas pumps oscillate wildly, sometimes changing several times a day. The rises and falls are far from random, however. Studies and market observers say it is an attempt by big oil to ratchet up the cost of a fill-up as high as possible.

Photo Gallery: German Petrol Prices Higher than Ever Photos
DPA

It's Easter weekend and, if all goes as usual, motorists will be hopping mad during the holiday. Their frustration will boil over when the needle reaches the red zone and they pull into the nearest filling station: first at the pump, then at the cash register.

That's where they'll note with dismay that the oil companies never tire of playing the same old game in the run-up to Easter. As in previous years, gas prices soared in the days leading up to the Friday before Easter -- just when millions of Germans head off on vacation.

In 2009, prices jumped by as much as 11 euro cents per liter ($0.54 per gallon) compared to weeks prior, as was documented in the Cologne area by a report released last year by Germany's Federal Cartel Office. At the time, the Bonn-based anti-trust agency said it was "plausible" that the oil industry was "purposely raising prices."

The study generated a great deal of attention, but failed to impact business practices in the sector because the Cartel Office was unable to prove that the companies had engaged in illegal price-fixing. Now, one year after the report's release, the profiteering practices of the oil companies have reached such a dimension that it would actually warrant a new official investigation.

Prices have never fluctuated as wildly as they have over the past few months. Last week, the price of premium gasoline reached €1.70 per liter ($8.41 per gallon) nationwide -- a new record for Germany. Sometimes, prices at the pump spike upwards by over 10 euro cents per liter in the space of just minutes, usually followed by a gradual decline.

Systematic Confusion

Motorists will have to brace themselves for yet another round of price gouging over the Easter holiday. Indeed, the last taboo appears to have fallen in the fuel business. At oil company headquarters, staff have recently started working on Saturdays and Sundays. This allows them to raise retail prices even on holidays. It's endemic of the new pricing regime that the oil industry is trying to implement: The idea is to create systematic confusion.

The erratic prices at the pump frustrate consumers, who feel trapped and exploited. High gasoline prices tear large holes in their budgets and damage the entire economy. The prices are like an additional consumption tax: The more people spend on energy, the less available income they have for other products and services.

Today, German drivers of diesel-powered cars spend approximately 34 euro cents more per liter than they did two years ago. This means that a motorist who annually drives 15,000 kilometers (9,300 miles), consuming on average 10 liters of fuel per 100 km (23.5 miles per gallon), now spends €510 ($675) more every year.

It's probably inevitable that crude oil prices will continue to rise, causing fuel to become increasingly expensive. After all, this is a limited resource, and the scarcer it gets, the more valuable it becomes. This also makes it necessary for society to kick the oil habit and look for alternatives.

But this state of affairs by no means justifies a handful of oil companies raking in the profits. People have grown wary of these firms. The two largest, Aral and Shell, control nearly half of the German fuel market; add Esso, Jet and Total to the mix, and five companies dominate over two-thirds of the sector in Germany.

Concentration of Power

In the refinery business, they even jointly operate a number of facilities. Their parent companies, including BP, Royal Dutch Shell and ExxonMobil, rank at the top of the list of the world's largest companies.

Wherever there's such a concentration of power, the major players could easily be tempted to abuse it -- that is, at least, the general suspicion. Steffen Bock has made an interesting observation here. The entrepreneur says the price curves have suddenly taken on new shapes, and become more erratic and unpredictable.

Hardly anyone charts gasoline prices as painstakingly as Bock, who holds a degree in business administration and lives near the southern German city of Nuremberg. For the past 13 years, he has run clever-tanken.de, an Internet platform that allows German motorists to compare service station prices. The website attracts some 3.8 million visitors per month.

The site allows users to locate the least expensive filling station in their vicinity. Bock receives information from thousands of volunteer gas price watchers, from the research efforts of his 12 employees and directly from a number of gas stations. Currently, his greatest challenge is even getting wind of every price change, because there are simply so many.

The oil companies are constantly launching new initiatives, says Bock, and sometimes they change the prices at a station five times in a single day. Such changes used to happen once or, at most, twice a day, he says. Before, the rule of thumb was that Monday morning was the cheapest time to buy gas. Now, it's a whole new ball game.

Today, companies are pursuing an entirely different tactic: They cause confusion -- and they do it on purpose. "Non-transparency is their business," says Bock, and he explains the logic: Motorists are supposed to lose track of price trends. Then they can't really tell anymore whether fuel has just become more or less expensive.

New Threshold Price

Chances are good that they will catch an expensive phase. The oil companies are doing everything they can to keep the prices up as long as possible. Last week, for example, the companies made repeated attempts to get the price of diesel to remain above the €1.50 per liter mark, according to Bock. Evidently, it's hoped that customers will get used to the new threshold price.

The price fluctuations are erratic and apparently without any deeper meaning. But there's no doubt that the oil companies know exactly what they are doing.

The market leaders can only pursue this strategy, though, because they have sophisticated computer systems that allow them to precisely control, right down to the minute, when they increase their prices nationwide, and by how many cents. The prices are not set by the individual franchise holders. Instead, they are centrally controlled -- for example, in the town of Bochum, at the headquarters of Aral, a BP subsidiary that is the market leader in Germany.

The price manager merely presses a button and price signs immediately change at all 2,391 Aral service stations in Germany. All filling stations are electronically linked with Bochum via a dedicated network called Rosi. After each price increase, they watch closely to see how the competition reacts and whether they follow suit.

There's an Aral gas station right across the street from the headquarters on Wittener Strasse. The station franchise holder can observe how his toughest competitor, a nearby Jet service station, reacts to the price changes. He checks the Jet website on the Internet to find out how much the filling station is charging for the various types of fuel, or he briefly drives by. If the competitor's prices are significantly cheaper, the Aral franchise holder can, with the help of Rosi, apply for permission to reduce the prices again.

Then, on the other side of the street, at the Aral headquarters, one of the 16 staff members in the price department assesses whether the request is justified and plausible. Up to 6,000 such applications are submitted every day by franchise holders throughout Germany. Just one year ago, when the sector was calmer, there were roughly half as many requests to reduce prices.

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1. No confusion - markets respond to demand
smdani 04/05/2012
Today companies have tremendous pricing power than say just five years ago, why? simple ever more powerful computers permit companies to adjust prices literally as one is filling up fuel in car. As long as companies know that all the consumer is expected to do is moan and complaint about higher prices - but look who is laughing all the way to the bank looking at consumer's unhappy face. If you don't believe me - organize a boycott for two days - preferably on a Friday and Saturday. See what happens.
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