Terrorism's Fallout

The terrorist attacks of Sept. 11 sent a shudder not only through the population of the United States and our allies, but through the petroleum marketing industry as well.

Shortly after news of the strikes hit the airwaves, reporters began talking about gasoline jumping to $4 and $5 a gallon. In response, many in the public arena began to scream "Gouging!" and state attorneys general across the nation began launching investigations.

Unfortunately, media reports and the actions of some elected officials did not take into account the very real market dynamics that influenced pricing decisions at the wholesale and retail level. This lack of insight on the part of public opinion leaders, unless corrected by marketers themselves, will continue to hurt the industry during future disruptions or global events.

Marketers should take advantage of the attention being paid to the industry in the aftermath of Sept. 11 and educate reporters and elected officials. A good starting point is to discuss what actually happened to the markets on that fateful day. Shortly after the networks began reporting on the terrorist attacks, consumers panicked. Many retailers reported lines of 200 or more cars, waits in excess of six hours, and single-day sales increases of 150 to 400 percent. With such a spike in demand, many retailers feared they would run out of fuel. This concern was compounded by word from some suppliers that future deliveries were uncertain. Looking to conserve what they had, some retailers raised prices to dissuade consumers from buying their gasoline.

At the same time, suppliers, concerned about available supply, looked to conserve where they could. Many spiked prices by 5 to 20 cents a gallon, placed retailers on strict allocation and even prohibited delivery to others. In some parts of the country, terminals were simply closed. These activities added to the uncertainty in the market.

In the days after, suppliers rescinded their wholesale price increases for their branded outlets and announced the existence of sufficient supply to fulfill their contractual obligations. However, because of concerns about overall product supply, many continued allocating product and increased prices to unbranded retailers. For example, unbranded wholesale prices in Chicago rose more than 30 cents per gallon in the week following the attack while branded wholesale dropped about five cents per gallon. In addition, as retailers sought to replenish their supplies following Tuesday's consumer rush, many were charged between 20 and 50 cents per gallon in overlift fees. All of these factors contributed to some retailers raising their prices. Opinion leaders need to understand that.

A bigger question to be answered, however, is why did the terrorist attacks, which did not strike any refineries, terminals or pipelines, concern industry participants to the extent that many sought to conserve supplies?

Up Again

I have written in this column numerous times this past year about the delicate balance between supply and demand. The proliferation of boutique fuels, the drop in number of domestic refineries and the extraordinarily high rates of refining capacity utilization leave little or no room for trouble. Analysts have insisted that one hiccup in the system could result in significant shortages and price spikes. These warnings came to fruition on Aug. 14 when the CITGO refinery in Lamont, Ill., caught fire, taking 160,000 barrels per day off the market. Prices rose more than 20 cents per gallon in less than two weeks and the impact quickly spread to neighboring markets. The attacks of Sept. 11 were much more dramatic and prompted a gas run.

As I write this, experts caution that the battle against terrorism will be a long one, bringing into focus the uncertainty under which marketers must operate. What kind of foreign retaliation will be attempted against American attacks? What security precautions will govern port authorities, terminals and pipeline operations? What are the long-term impacts on crude-oil supply from the Middle East?

Although prices have decreased significantly in the weeks since the attacks ? possibly because of the decreased demand for aviation fuel ? continued uncertainty poses a significant threat to the stability of the market. The slide in prices does not signal a better balance between supply and demand, nor is it an indication that gasoline prices will not increase again. Congress and state officials remain vigilant in their campaign to protect consumers from opportunistic marketers.

Meanwhile, all marketers carry the obligation to ensure these crafters of public policy understand the true reasons behind the Sept. 11 price hike ? and not to let public officials and the media gouge the truth.