gas

A few weeks ago on a slow day at Hawkins Ultramar (the local gas station), I quizzed owner Janice about her business.  How, I wondered, was it possible for gas prices to vary so wildly in a day?  Some days, her gas will change by as much as 10 cents a litre (that’s a little less than 40 cents a gallon).  How does she manage inventory in that circumstance? And who makes all the profits in the gas value chain?

There’s a simple answer, it turns out.  She doesn’t own the gas she pumps.  She pumps it on consignment.  The prices are set out of Montreal.  Now, the local station owner does have some latitude, and part of Janice’s job is to look at what the Esso up the street, Drummond’s in Manotick, and other local competitors are charging, in order to remain competitive.  There is, however, a floor price set by Ultramar.  Anything above that price is extra profit for the station owner, and the station owner is guaranteed at least 2 cents per litre if local competition drives the price lower.

It’s a tough business.  She makes most of her money on the station shop, and the U-Haul depot.  Gas is the draw to get people in the door.

Selling gas is a bit like selling telecom service.  It’s intensely price competitive for the base commodity.  Add-on services (the items in the shop), are where the profits are made.  In fact, as the photo shows, they’re often sold together now. 

Gas, however, is different from telecom in at least one respect.   The oil producers and refiners are making out like bandits.  Just last week, Exxon Mobile reported that profits were up 35% in the prior quarter, and Royal Dutch Shell reported a 40% pop in profits during the same period.

Oil is in short supply.  Telecom minutes aren’t. 

The late 1990′s saw a massive build-out of fiber networks, followed by a catastrophic market collapse.  According to Telegeography, by the end of this year, as much 14% of the existing fiber capacity may finally be lit.  Telecom has a glut of capacity, and technology continues to march forward.  Some analysts are saying that advances in technology could increase the capacity of existing fiber by 1000 times - essentially limitless bandwidth using today’s applications.  In that respect, telecom is more like DeBeers, trying to soak up the worlds supply of diamonds, than the oil industry. 

According to Adventis’ John Ryan, residential bandwidth demand has historically increased by a factor of four every four years.  If true, and assuming no advances in fiber technology, by 2009 we might see 50% of that fiber lit.

Competing on the basis of metered bandwidth usage, whether in the form of kilobytes, or minutes, is a mug’s game. The basis of competition must shift to new services, or the carrier will die.  However, few, if any, carriers globally have the technology capacity to be able to develop those new services themselves.  They’re turning to third parties, inking distribution agreements for innovative new services being developed elsewhere. 

In that respect, incumbent carriers are perhaps more like the shop keeper running a gas station than they might like to be.

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