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Why isn't Sheetz gas cheaper? Ask Annapolis

April 24, 2005|by Tom Firey

Fairplay resident Chuck Dodson makes an excellent observation in his April 9 letter to the editor:

"The 'Big Red' gas stations have, in the past, been most considerate to the public with lower-than-average pricing. However, they have now become the leader in establishing area prices. I think you know who 'Big Red' is. In Hagerstown, Big Red is the first station to raise prices, with other stations rapidly following their lead."

By "Big Red," I assume Dodson means Sheetz - the always-open nirvana of fast food, fuel and clean restrooms. Along the eastern seaboard, Sheetz is known for its MTOs, cinnamon rolls, and having some of the lowest gas prices in town.

Unless that town is in Maryland. As Dodson points out, Sheetz gas prices in the Old Line State are about the same as other retailers. The story behind this lack of price competition is a fascinating one, involving decisions made in Annapolis, not in Sheetz's headquarters in Altoona, Pa.

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The story begins with the 2000 world oil market price spike, which caused gas prices to soar. Consumers responded by avoiding service stations and instead, buying gas at lower prices from convenience stores like Sheetz and Wawa, as well as grocery stores like Martins and shoppers clubs like Costco and Sam's Club. Those retailers have traditionally sold gasoline at little profit (and sometimes at a loss) in order to lure customers into their stores.

Sheetz and Wawa were both expanding heavily into Maryland at the time, and grocery stores and shoppers clubs were quickly installing gas station islands in their parking lots. The thought of motorists queuing up at those retailers filled service station owners with dread.

By late 2000, the owners decided to fight back. They appealed to state lawmakers for help, knowing that Annapolis has a rich history of restricting price competition.

The following spring, a group of lawmakers - including local Del. John Donoghue - sponsored House Bill 736 and Senate Bill 687, prohibiting retailers from selling gas below state-established, constantly adjusted, minimum prices. Those prices are derived for different parts of the state from average wholesale prices. Any retailer suspected of selling cheap gas would be subject to investigation by the state comptroller's office. If investigators find below-cost gas prices, the comptroller's office could suspend or revoke the retailer's license.

The bill's supporters, led by Annapolis ber-lobbyist Bruce Bereano and the deep-pocketed WMDA Service Station Dealers association, argued the law was necessary to prevent "predatory pricing" - one retailer undercutting competitors and driving them out of business, then raising its own prices. But I've yet to hear any of the supporters cite any instances where Sheetz or Wawa has carried out this drive-'em-out-and-gouge strategy, or explain how the strategy could work in the real world. (Predatory pricing is sort of the Piltdown Man of the economics world; economists have largely discredited the strategy as unworkable.)

Sheetz and Wawa fought hard against the legislation, claiming it would be bad for consumers. Of course, the two retailers are primarily concerned with their businesses, not consumer welfare. But they're enlightened enough to know that their business models only work if they make a lot of consumers happy, and low gas prices make consumers happy. So, in fighting to maintain their business models, Sheetz and Wawa were also fighting for something consumers want - cheaper gas.

The fight was in vain. Both houses of the legislature passed the bills by overwhelming majorities. (All members of the county's legislative delegation at that time voted for at least one of the bills.) Then-governor Parris Glendening signed the bills into law on May 18, 2001. Afterward, Comptroller William Donald Schaefer sent letters to various Maryland newspapers (including The Herald-Mail) proclaiming the legislation "good for the consumer" and assuring motorists that they wouldn't see price increases.

The law went into effect that October, and Sheetz and Wawa promptly raised their gasoline prices.

But few people noticed. The terrorist attacks a few weeks earlier had resulted in a dramatic decrease in U.S. travel, which produced a glut in transportation fuel and an overall drop in gas prices. Since then, there have been some short-term price spikes resulting primarily from supply interruptions, but higher prices have not been sustained long enough to focus attention on the competitiveness of the Maryland gasoline market.

Until now, that is. The past year's growing demand for oil by China and the developing world has produced a sustained increase in world oil prices. That has pushed up wholesale gas prices and, in turn, the state-mandated minimum gas price.

Consumers are understandably upset with the higher prices, and have noticed that Sheetz is no longer a nickel or so cheaper than the rest of the market. Instead, retailers are raising and lowering their prices in unison - just as the 2001 legislation intended.

Hopefully, those consumers will start asking their lawmakers an important question: What's so wrong with cheap gas that you went and passed a law against it?

Thomas A. Firey, a Washington County native, is managing editor of the Cato Institute's Regulation magazine and senior fellow for The Maryland Public Policy Institute. He may be contacted by e-mail at tfirey@cato.org.

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