November 12, 1989
Superior store cuts gas prices
With refinery here, why are area gas prices so high?
By Wayne Nelson, News-Tribune staff writer
The gas war Gary Sorenson launched three weeks ago again has focused attention on the state of competition – or lack of it – in Duluth-Superior’s gasoline industry.
Sorenson, manager of Super Town Foods South at 6301 Tower Ave., cut pump prices Oct. 21. Since his action, retail prices for unleaded gas in Superior have fallen by 15 cents a gallon. But the war has had only limited effects in Duluth, where major retailers serving both cities have dropped prices by just a dime.
Much of the gas sold in both cities comes from a single source: the Murphy Oil refinery in Superior. For years, outsiders have puzzled at a market that sustains retail prices at 5 cents to 10 cents a gallon above those in the Twin Cities, and in Green Bay and Eau Claire, Wis.
“Why are our prices so much higher when we’re right next to a refinery?” said UWS economist Gerry Hembd. “It’s probably the one question I’ve consistently been asked more than any else. I’ve poked around the edges, but it’s a difficult market to crack.”
Sorenson, a grocer, has only sold gas since he assumed management and part-ownership of Super Town Foods South 17 months ago. But he’s noted what many Twin Ports residents have known for years.
“For some reason around here, everybody’s (retail prices) are the same,” he said.
Sorenson hasn’t seen illegal price fixing, but he’s noticed what he termed widespread “lazy marketing.”
“I think what happens is everybody figures we’re all going to be the same price, so we may as well (set them) up here, instead of down here,” he said.
His competitors cite a host of factors contributing to high retail prices here, and insist they need higher margins to survive than their southern counterparts.
They said in part because Duluth-Superior is a small market, many retailers here sell far less than 3,000 gallons daily. By contrast, many Twin Cities stations pump 7,000 gallons or more each day, enabling them to spread fixed costs, such as insurance and rent, over a wider volume.
As a result, a high-volume operator can survive on a narrower margin on each gallon sold than can a smaller station.
Robert Thatcher, one of Sorenson’s competitors in South Superior, said retailers there were getting 15-cent margins or better before the gas war, but those have slipped to near 6 cents a gallon.
“A 15- to 20-cent margin is necessary (to survive),” he said.
Retailers also said their prices are high because wholesale prices they pay are often 5 cents to 10 cents a gallon higher than in the Twin Cities, Eau Claire and Green Bay. Each of those markets is served by multiple pipelines and refineries.
By contrast, the Murphy refinery is a major gas supplier in Duluth-Superior, and competes with a single pipeline, operated by Williams Co. Lakehead Pipe Line Co. in Superior ships only crude oil and natural gas liquids.
As the dominant supplier, Murphy Oil plays a major role in setting wholesale prices in Northeastern Minnesota and Northwestern Wisconsin.
Mike Doyle, a market analyst for Computer Petroleum Corp. in St. Paul, said the difference between wholesale prices in the Twin Cities and Duluth-Superior narrowed to 0.4 cents in mid-September, but has since widened to 3 cents.
He said wholesale prices here tend to be higher because the level of competition isn’t as stiff as in markets with several pipelines and refineries.
“The big aggressive trading comanies don’t get up to your neck of the woods,” he said.
Maurice Peel, spokesman for Murphy Oil in El Dorado, Ark., said the company sets its wholesale prices to meet its competition, adding that its refinery in Superior directly supplies no more than 30 percent of the gas ultimately sold by retailers here.
But through exchange relationships, Murphy also supplies some of the gas that other companies sell in the Twin Ports, giving the Superior refinery pricing control beyond the share it markets directly.
Peel wouldn’t disclose the refinery’s exchange volume.
UWS economist Hembd noted that a dominant refinery selling in a local market has no pipeline transportation expenses, and should have a cost advantage over its competition.
“It could price for less, but what would compel it to do it? Nothing,” Hembd said. “So long as their wholesale price is just under someone else’s, regardless of their cost of production, they’re meeting the competition.”
Through its independent-operated Spur network, Murphy also likely influences local retail pricing, Hembd said.
Paul Bilger, Murphy’s vice president of manufacturing, said the Canadian and North Dakota crude oil that it refines in Superior is cheaper than the Gulf Coast grades that supply its Louisiana refinery. But the North Dakota and Canadian crude is lower quality, and produces a smaller amount of high-margin gasoline and other refined products per barrel.
While describing the Superior refinery’s margins as good, Bilger said the small market it serves limits its efficiency and profits.
Here are a couple more details on the gas war from other articles…
- Sorenson cut his prices to $1.01 a gallon for unleaded and $1.05 for leaded, a drop of 8 cents to 13 cents below his competition before they followed suit.
- Some competitors claimed the “war” was not over gas, but instead milk. They said Sorenson was using gas as a loss-leader to lure in grocery shoppers. Those competitors, in turn, slashed their milk prices down to $2.25 a gallon for 2 percent, and Sorenson was forced to do the same.
As so often happens in the News Tribune files, there are no additional clippings about the Superior gas war of 1989. Can anyone recall any more details – how long it lasted, etc.?
What was once Super Town Foods South is now home to Superior Meats.