Marketing Energy?
Ranting is allowed. Plus, industry changes.

By Jeff Fischer (TMFJeff@aol.com)

Paris, France (Jan. 27, 1999) -- Americans hardly need to be persuaded to use electricity or power sources of any sort. Possessing less than 5% of the world's population, America manages to consume 20% of the world's natural resources -- and not just because many large businesses reside in America. The average individual in America uses twice as much energy during their lifetime as the average European. Much of this is simply due to waste.

Energy sources (including gasoline) are so inexpensive in America that people don't think to conserve it. The most recent aggressive campaign to conserve energy took place in the early 1980s, and it ended in... well, the early 1980s.

Unfortunately, such movements materialize only during times when energy isn't so economically easy on the wallet. There's no denying that America is a country driven by finances. According to Bill Bryson in his book Notes From a Big Country, Americans were among the only people in the world who, in an international survey, said that they'd rather suffer dirtier air and a less healthy environment if it meant saving the economy from the tiniest of slowdowns. (There's long-term, forward thinking for you.)

At the 1992 Earth Summit (again stealing facts from Bryson), Clinton and the U.S. promised to reduce the country's emission of greenhouse gases to 1990 levels by the year 2000. Here we are in 1999. Rather than keep its promise, the U.S. has actually managed to increase its greenhouse gas emissions by 8% since the '92 Rio summit. And all the while, more efficient forms of energy (cleaner forms, anyway) have become a smaller part of our energy source than they were as long as twelve years ago.

With that backdrop in place, today we discuss the marketing of oil and natural gas. Natural gas is a necessity to living, for heating and cooking, so there's little to consider on the marketing side. Especially since a natural gas company can't market services to you if it operates in Silicon Body, California, and you're living in Chowderville, Massachusetts. Thus, you won't see many advertisements on your idiot box persuading you to switch gas companies. Not even if you have 500 channels. However, natural gas is a thrilling necessity of life that is becoming less regulated and is still just as thrilling. (Brian wrote the best column on natural gas that I've ever read. If you want to brush up, click here.)

Next: the marketing of oil.

Oil and its resulting fuels are as American as hot dogs and guns. The U.S. is the proud owner of over 200 million registered cars (about one for every legal adult, since the country has 270 million happy-go-lucky consumers total), and all of those cars run on cheaper-than-a-bag-of-McDonald's-french-fries gasoline.

In fact, it's rumored that long ago inexpensive gasoline was added to our constitutional rights by a man with questionable foresight, because gasoline is now notoriously cheap in the U.S., and if there's ever a chance of prices rising the slightest amount due to new taxes, the public erupts in protest and vows to oust every politician from office. Hence, we pay one dollar per gallon of gasoline and then we drive our cars as if they run on something entirely replaceable and mindlessly expendable.

America is a country of commuters who largely prefer to sit on a jammed highway every day, twiddling their thumbs for two hours in their hysterically underutilized utility vehicles, rather than take a train for one hour each day and read something interesting while rolling down the track. Hence, the majority of Americans want cheap gasoline. Of course, a majority is needed to elect a politician. Hence, we have $1 gasoline and we drive gas guzzling Range Rovers and Jeeps that are always spotless, even though they're really meant for off-road use. (I have something against these gas hog sport vehicles. They're not only wasteful, but they block the entire view from your smaller, efficient car.)

What happened to fuel-efficient cars? Suddenly everyone needs a jeep that can cross streams, fallen trees, and mountains, even though the only thing they ever cross are crosswalks on the way to bake sales. Cheap fuel made the '90s the decade of the macho pickup truck and sports vehicle. May it soon rest in peace. Meanwhile, the air around D.C., Chicago, Los Angeles, and New York becomes browner by the year. You can notice the change yourself if you periodically snap photos.

In Europe, a gallon of gasoline is $8. Hence, cars are typically small and efficient and are used with more thought. If it weren't for taxes, gasoline in Europe would also be $1 per gallon. The government taxes gasoline for all sorts of reasons: pollution cleanup and control, to cover road costs, to encourage public transportation, and so forth. All very logical. In America, it's a buck for gas and then the roads you drive on are barely passable. (Hey, maybe utility vehicles are the right idea -- they add more to road damage, but they can take it, too).

All of this is a long-winded way of saying that the marketing of gasoline is hardly an art in the U.S. People fill up their gas tanks as regularly as my Great Aunt plays Bingo (and that's almost every night, bless her 92-year-old gumption). Nonetheless, the marketing of gasoline is changing.

You'll frequently see commercials on your television for Mobil, Exxon, Amoco, Texaco and others. Mobil (NYSE: MOB) and Exxon (NYSE: XON) are #1 and #2 at marketing in the U.S. (so their merger is powerful in this regard, too), but all of the large oil companies have giant marketing budgets that aim to differentiate their fuel and services from the competition. Because prices are typically identical, the only differentiation possible involves quality of product (an image issue) and the services offered. This includes the somewhat recent addition of "Quick Pass" services, where you pay at the pump, or Mobil's "key pass" system, where you wave a key across a scanner and you're set. It also involves company-specific credit cards that award loyal use.

The differentiating of services is important for oil conglomerates, as is image, so they pay handsomely to advertise both. Each company tries to convince us that their fuel is technologically better, cleaner and more efficient than the competing fuel on the market, and that buying from their pump is quicker, cleaner, easier and more friendly than buying gas across the street. These are the few "cards" these companies play. (Innovation apparently isn't valued in this industry yet. Surely a company could derive something better: fill your tank and rent a movie, too; or, fill up and do your banking at once; or, fill up and get free coffee. That last one has been done.)

Fairly new on the competitive front are small convenience stores (akin to 7-11s) that are beginning to sell gasoline, often at prices slightly below the Exxon or Mobil across the street. To combat this, Texaco (a marketing leader) and other national gasoline companies are upgrading the convenience store aspect of any appropriate location. Companies are going so far as to add McDonald's, Taco Bell, or KFC -- all of which offer you less nutritional value than the gasoline that you pump into your car. Chevron (NYSE: CHV) is actually adding a gourmet food store, of sorts, to its chain of 8,100 gas stations. Profit margins at convenience stores are usually higher than can be hoped for selling gasoline.

As for the marketing of gasoline in the future: innovation and heavy advertising of services (both old and new) will continue to be key. Exxon is my favorite: I can't get that "Rely on the Tiger" saying out of my head.

Summary. We've covered the general landscape of the oil and gas industry and OPEC, we've covered "Upstream" operations (which involve exploration and production), and "Downstream" operations (refining, transporting and marketing), and now, beginning next week, we're ready to study companies from our list on an individual basis.

Remember that this overview has been precisely that: an overview. We'll learn much more about each aspect of the industry as we study companies individually. If you want a quick review to date, see Brian's column (and our list of companies) from last week. To discuss anything before we progress into next week, please visit the "Drip Companies" or "Drip Investing" message board linked in the top right of this page. The Fool's Web server is solar-powered, so on sunny days you find the boards most active.

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