1) We have a number of stores/service stations in a large metropolitan market. What tools are available to ensure my supply costs are competitive with the larger players in market?
We I have a number of stores/service stations in a large metropolitan market. What tools are available to ensure my supply costs are competitive with the larger players in market? Larger companies may use a number of methods to optimize costs and manage risk associated with supplying their network and 3rd party sales obligations. These include location exchanges, hedging of inventory positions, and opportunity arbitrage purchases and sales. They also have large organizations to support these activities. While some of these tools are available to smaller marketers, whether or not they are necessary or advisable depends on your objectives, your supply organization capabilities, and accessibility to infrastructure in your market. Opportunities to leverage ratable product demand are often not fully exploited; however whether these benefits justify direct participation in some aspects of product supply and inventory management requires a detailed analysis based upon the competitive landscape in your market and your position in that market. While this evaluation may not be easy, benefits could be significant.

2) We are considering a cross border expansion of our retail network into a developing market. A government company is involved in both supply and marketing. Our business model is based upon competing from the rack forward but we are uncomfortable with the lack of formal regulations and industry practices. Advice?
Expansion into a new market is one of the more difficult decisions any company can face. Economic analysis is difficult due to a higher degree of uncertainty. Cultural differences also have to be considered. Marketing of petroleum products is usually subjected to some government regulations to ensure adequate supplies and a competitive marketplace. However, prevailing industry practices may be at odds with the letter of the law through either mutual consent or practicality. On the ground investigation of how the industry actually works is essential before any investment. Are some players favored over others in times of shortages? Is pricing a level playing field? What legal recourse is available? A detailed analysis of the existing regulations is also required should they be enforced. How would they affect your competitive position? How can they be changed? These and a number of other scenarios with probabilities and their impact on your business plan should be addressed. Any lessons learned from others with market entry experience may provide valuable insights. Against this background, and a realistic assessment of your competitive strengths and weaknesses, risk and rewards will have to be weighed to determine if a market expansion is the best use of your available capital.

3) We have seen a number of supply terminals in our market close in recent years. Is this trend likely to continue and will it limit the number of suppliers in the market?
Major oil companies have rationalized and/or sold a large number of terminals over the last 20 years. That has resulted in increased throughputs and efficiency at their remaining terminals. At the same time, independent terminal operators' market presence has increased to service those marketers who cannot justify the investment in their own facilities. This trend is likely to continue. Product storage, once looked upon as a cost of business for marketing companies, has evolved into a P&L business and only efficient facilities and operators will be competitive over the long-term. While the number of facilities has been reduced, the number of suppliers may actually increase. Both the oil marketing companies and independent terminal operators have provided access to their facilities for marketing competitors, either through exchange agreements or throughput contracts, to drive down unit costs.

4) Will the environmental regulations concerning product quality result in higher prices?
Directionally, any change in regulations increases the cost of manufacturing fuels products will put upward pressure on prices. However, prices are more influenced by supply and demand than cost of production. The investments needed to meet more stringent product qualities may also increase production capacity which would put downward pressure on prices. Also, the fragmentation of product specifications required in different regions in the U.S. can add to more localized price volatility by limiting the ability of industry to react to supply disruptions through reallocation. Industry organizations continue to lobby officials at the federal, state and local levels for a more homogenized approach to motor fuel's quality specifications.

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