A Strange Silence Falls Over the Gas Stations

Why the retailers aren't yowling at the thought of the state slapping price controls on diesel.

The use of government price controls is a last resort, wrote members of the Trajtenberg committee two months ago in their report. It is a measure to be employed only when competition simply cannot be increased in the near future, according to the committee's recommendations.

"Controlling prices is just a temporary solution and a partial one at that," reads the report. However, only a few pages later, the committee devoted to studying Israel's social ills and thinking of ways to cure them proposes just that: government control over the price of diesel.

A gas station in Israel  - Nir Kafri.
Nir Kafri

Based on past experience with energy and telecom companies, one might have expected an explosion of outrage from the dominant players in fuel retail at the mere thought of government meddling, especially as the scene is controlled by just four companies that share 90% of the market.

Yet while the gas exploration companies howled out against the government "changing the rules" and the mobile operators kicked as hard as they could, neither the fuel retailers nor the oil refineries have so much as peeped. They have been silent since the Trajtenberg committee, headed by economist Manuel Trajtenberg, urged that controls be restored to diesel. They didn't even twitch as the recommendation morphed into a government resolution (that has yet to pass ).

Is it a new media strategy on the part of savvy retail companies? Or does the silence represent obedient, nay, willing acquiescence to a move that will, in fact, benefit them?

King of the road

Fuel prices were a key point of contension in this past summer's social protests over the high cost of living. Most of the discontent focused on the price of gasoline, 95-octane and so on, which is controlled by the government.

Once a month the state recalculates and hands down the maximal price gas stations may charge. The price is based on the cost of crude oil in Europe during the last days of the preceding month.

But about 45% of the fuel used in transport in Israel is diesel. Control over the retail price of diesel sold at gas stations was rescinded in 1993, and control over the wholesale price from refineries to the gas retailers was removed in 2006.

Diesel is distilled from oil at both of Israel's refineries, Oil Refineries in Haifa and the Paz refinery in Ashdod. Historically the two refineries were part of one company, Oil Refineries (locally known as Bazan ), but the company was split up and privatized in 2006-2007. The Ofer family's Israel Corporation bought the Haifa refinery, which is the bigger of the two, and Zadik Bino's Paz bought the smaller one in Ashdod.

No need for controls over diesel, they think

It was during the company's split and privatization that the government did away with controls over the wholesale price of diesel, intending for the two refineries to compete. But the Ashdod refinery's sale to Paz, the dominant player in fuel retail to consumers, simply meant that most of that refinery's sales were to Paz. Since then, other fuel retailers have had to rely on a single supplier, Oil Refineries, which is therefore, ostensibly, a monopoly. Competition from imports isn't an option because of high entry barriers.

The control that the Trajtenberg committee proposes, however, is over the retail price at gas stations, not the wholesale price at the gates of the refineries.

For years the conventional wisdom had been that price controls over diesel were unnecessary. Most diesel consumers are companies buying in bulk, that have bargaining power, according to the reasoning. Only 2.8% of Israel's cars use diesel, compared with 81% of commercial vehicles, 97% of taxis and 100% of buses.

In plain terms, commercial vehicles of one type of another use 97% of the diesel sold in Israel.

Two-thirds of the volume of diesel is sold in bulk deals signed between the fuel retailers and the bus companies, vehicle fleets, truck transport companies and so on, which haggled ferociously over price.

Only a third of all diesel sales occur at gas stations - according to an inquiry by the Antitrust Authority and the National Infrastructure Ministry - and those sales are mainly to car fleets, that also have special deals in place. A tiny fraction of diesel sales at the pump are to the chance customer.

The status quo could change. "There have been attempts by taxi companies to buy diesel in bulk through direct marketing deals," says Gabi Ben-Harush, chairman of the Israel Road Transport Board. But that proved uneconomic. Today most taxis and trucks (that don't belong to giant fleets, which have fueling arrangements of their own ) buy fuel at gas stations, using automated payment systems (dalkanim ).

Watchdog gone, retailers party

All gas stations publish the price they charge for diesel, which they revise from time to time. But nobody pays the list price, which presently averages to NIS 14.50 per liter. Fleets lock in discounts and the casual buyer pays just NIS 7.50 per liter - and is still subsidizing the discount rates of the institutional customers.

The unsupervised marketing margin that gas stations earn on selling diesel to casual consumers is much bigger than their margin on gasoline.

In September the state ordered gas stations to narrow their margin on gasoline by 25%, after deciding they had increased it too much over the years. The gasoline retailers had made hundreds of millions more than they were supposed to under the rules, the government decided. One can only imagine how much gas stations have made on diesel, and to what degree casual consumers are subsidizing the car fleets.

The distortion in the market isn't just a problem for the odd passing consumer. "There are indications that the selling price of diesel, at least to some car fleets, reflects a marketing margin that's wider than the supervised margin on gasoline," the Finance Ministry noted recently.

Not long ago, retailers were in fact slapped with a class action lawsuit, which claimed that they had taken advantage of periodic updates of gasoline prices in order to jack up the price for diesel to some corporate clients. The petitioners claim to have paid even more than the casual consumer would.

Economist Shlomi Dagan with the Israel Consumer Council supports control over diesel. "After control was rescinded, we saw the price increase by tens of percent, and we saw that car fleets and organized customers received prices tens of percent lower than the price to the private consumer. It is true that not many cars are powered by diesel, but the absence of competition raises the cost of services and products for all consumers. When four companies control 90% of the market, there can't be competition."

Fleets will pay the price

Slapping controls over diesel prices at gas stations should presumably reduce the suppliers' profits. Yet surprisingly, as noted above, the retailers didn't moan: they did nothing.

One reason could be that setting a ceiling on their margins will actually cause the market to rise accordingly to that level. Price wars over diesel will be a thing the past. The appearance will be that the government is looking out for the consumer. The outcome could be higher prices.

Price controls are set by the National Infrastructure Ministry's fuel administration, based on complicated formulas that factor in costs of import, maintenance and sales. Yet sometimes these things wind up being arbitrarily estimated, or they're based on figures provided by the fuel retailers themselves (for instance, wage costs, lease costs for the land on which gas stations sit, and so on ).

"You can't constantly haggle with the gasoline retailers about how many workers they have selling gasoline and how many work selling Bamba at their convenience stores. That isn't the regulator's job," said Moshe Shahal, a former energy minister, at a recent conference on energy.

Finally, twiddling with the marketing margin on diesel may well play into the hands of Israel's biggest corporate players. The controlled price factors in the companies' average cost of sales, weighted by each one's share of the market. Companies with a bigger market share (Paz, Delek Israel ) could enjoy an advantage of size, while minnows like Dor Alon or Ten would wind up with low margins.

"If you calculate the average height of people and put everyone into a room where the ceiling is exactly at that average height, then the short people will do better than the tall people," explained Dor Alon CEO Israel Yaniv at the conference.

So it appears that the big fuel retailers have little reason to yowl about the Trajtenberg committee's proposal. But the small retailers haven't been crying either.

"We don't oppose price controls on diesel," says Danny Ben-Ner, CEO of Ten, which runs exactly 4% of Israel's gas stations. "We already operate as though controls were in place and maintain a fair marketing margin. Each month we send our clients a list of our prices and those of the competition, trying to lead them to see not the size of the discount, but the price after the discount."

He continues, "Returning controls to diesel will increase transparency and clarity. Controls will correct the distortions. The price differences between different clients are huge; with control, things will be more balanced. Prices to small consumers will drop and the businesses will pay a little more."

So it seems the restoration of price controls enjoys wall to wall approval by everyone in the industry, even if their support is silent. The government gets to show it cares about the consumer. The consumer, in turn, gets the impression of government as a caring parent. The big gasoline retailers see it as rescue from the bared fangs of competition, and the small ones will benefit as "dalkan" deals between big business and big gasoline retailers are canceled.

Does anybody lose?

The big organized customers, apparently. They won't be able to get gargantuan discounts for their fleets at the expense of the little man in the car.