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Arco’s Gas Price Freeze Ends, But PR Benefits May Linger With AM-Gulf-Pump Prices, Bjt

August 24, 1990

BAKERSFIELD, Calif. (AP) _ The gasoline prices at Edmond Nassar’s Arco station were stunning to Ron and Nancy Sutton, who needed some good news after a Yosemite vacation interrupted by wildfires.

Preparing for the last mountainous stretch back to Los Angeles, they pulled off Highway 99 on Thursday to see it posted in big black letters: unleaded gas, 93.9 cents. Just down the road, a Texaco station was charging nearly $1.20.

But the low price wouldn’t last. Later in the day, Atlantic Richfield Co. said it would end a two-week freeze and raise wholesale prices 2 1/2 cents per gallon on average to its dealers.

The company said it could no longer supply enough gas to meet demand for the lower prices.

That means Arco, the eighth-largest U.S. oil company and largest gas marketer in the West, has ended an action that not only increased its market share, but yielded a rare public relations dividend at a time when other big oil companies were accused of gouging consumers.

Iraq’s invasion of tiny, oil-rich Kuwait has caused prices to soar for both crude oil and gasoline. A barrel of crude has risen from $21 to $30, while the price of unleaded regular gasoline increased from $1.075 per gallon on Aug. 1 to $1.237 this week, according to a spot check of self-service stations by the American Automobile Association.

Arco was able to freeze prices because it normally gets 100 percent of its crude oil from its own Alaska operations. Eugene Nowak, the head of the energy research group at Dean Witter Reynolds Inc., said that ready supply provided a cushion for the company as it decided to freeze prices.

Arco, considered a low-priced marketer, also relied on its West Coast refineries and all-self service stations to keep prices 2 to 3 cents cheaper than competitors.

Its wholesale prices had fallen as much as 13 cents per gallon below competitors in some markets since the Iraqi invasion.

But those low prices caused a surge in sales volume that approached 20 percent by Thursday, overtaxing Arco’s ability to re-supply many stations, said George H. Babikian, president of marketing and refining.

″We had our refineries at capacity, we were delivering every drop we could with our own fleet, we were working people on overtime to exhaustion, we hired every common carrier we could find, and still we were running out at 150 to 160 stations a day, sometimes for four hours,″ Babikian said.

Babikian disputed suggestions that the company’s price freeze was intended to curry favor with Washington in hopes that more Alaska land will be opened to exploration, or that a return of a windfall profits tax on oil can be headed off.

″I think our motive was very pure, to help the president in this very difficult situation,″ he said.

President Bush appealed for voluntary price restraints following the invasion.

Babikian said the plea ″sounded like a very reasonable request to us, and so we did it. To the extent that it generates good will in Washington, heck, we need all the help we can get.

″And the same thing goes for good will at the pump,″ he said. ″But those weren’t the reasons we did it.″

Scott Jones, a former Arco staff economist who is now president of AUS Consultants in suburban Philadelphia, said he believes the freeze was intended to increase market share. He said the move helped reassert Arco’s image as a low-price leader and win good will for its corporate citizenship.

It also smooths the way for the introduction this fall of additional lower- polluting fuels. The new gasolines, replacing unleaded varieties, cost more to make and presumably will cost more at the pump.

″It’s difficult to appeal to people’s sense of the environment at $1.30 a gallon, where it would have been easy at $1.05,″ Jones said. ″But if anyone can do it, (Arco) can, given the good will they’ve generated.″

But George Baker, an analyst with Merrill Lynch Research in New York, dismissed market share as a major reason for Arco’s action, saying he believed the company was already satisfied with its inroads. Perhaps more important strategically to Arco, Baker said, was the hope it can help calm congressional critics accusing the oil industry of price gouging.

″I think they (at Arco) do want the oil business to be in a stable political and economic environment,″ he said.

Babikian said Arco would not increase the wholesale price of its gasoline beyond increases in its refineries’ crude oil prices, which he said track the world market.

Now that Arco has ended the freeze, dealers in southern California, Arizona and Nevada will pay up to 5 cents per gallon more for their stocks, although company officials and dealers say Arco’s prices will still be the lowest around.

Nassar, the Bakersfield dealer, said Arco had always supplies him gas cheaply enough to allow him to meet his goal - beating or meeting the lowest priced competitors in town.

″Even with the price increase, we’re still the lowest,″ Nasser said. ″So we still have a great deal of room to play without losing our competitive edge.″

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