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Price Cuts? With plenty of competition and the worldwide glut in oil, why doesn't the price of gas and oil drop? The answer lies in the clubby nature of the oil industry. The majors simply do not believe in price cutting — which directly slashes their profits — and make common cause in avoiding it whenever possible. Their philosophy is that if one company cuts prices broadly, all will have to follow — and no one will end up with a competitive advantage. Says Loudon: "You can't build your share of the market with price cutting. The way to grow is to build pipelines, service stations, more depots." The result is that, like the auto and the cigarette industries, oildom's giants rarely compete on the basis of price. But they insist that they are competitive as well as clubby. "Personally, we may all be the best of friends," says Shell Managing Director Tim Wilkinson, "but after we say goodbye to each other, we go back to our offices and scrap like hell." At a time when profit margins are dwindling, one favorite way of hitting a competitor is to make it as expensive as possible for him to move into a new market. In Morocco, an old Shell market that Jersey Standard raided after the war, the Group applied all its efforts to bidding up the price of service station sites to discourage Standard.
The majors deny any collusion in setting gasoline prices, insist that prices are uniform only because they all have access to the same sources of crude, pay roughly the same costs to get oil from the well to the pump. But there are few successful challengers to their dominant price-holding role. Independents occasionally force the majors to lower gasoline prices at the pump, as they did recently in West Germany. But they do not have the world wide refining and marketing facilities for a heavy offensive, often cannot offer customers a sustained flow of oil at the same price. Big customers therefore must depend on the majors for oil — at the majors price. Furthermore, the majors are not above ganging up on an independent that challenges the price pattern, bringing the full weight of their power to bear.
Also arrayed against the consumer — the only one who stands to gain by lower prices — is a whole range of forces with vested interests in keeping up prices. Gasoline at the pump is fair game for a nation seeking revenue; out of the average price of 31¢ per gal. in the U.S., the consumer pays about 10¢ in taxes. Independents in the U.S. — which produces the world's most costly oil — pressured the Government to impose import quotas to protect them from cheaper foreign oil. Such regulatory groups as the Texas Railroad Commission make a concerted effort to prevent flooded markets by limiting production (a method that has prevented any real oil glut in the U.S.), thus in effect helping to keep up prices. The foreign oil-producing nations frown on price cuts, which nip at oil profits. Venezuela recently stopped three U.S. independents from selling Lake Maracaibo crude at $1.50 to $2 per bbl. when the posted price was $2.50.
But no one is sure how long the industry can hold the price line in the face of the glut and the ambitions of the independents. One veteran Mideast oilman predicts: "Within two years there will either be a cut in production or a big break in prices."