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Simple Supply/Demand, or Price Gouging?

Marathon gets targeted in attempt to tap both consumer anger and record oil company revenues.

In a prelude of what the landscape may hold for Big Oil, May of last year saw Kentucky Attorney General Greg Stumbo tap into the wellspring of anti-oil company sentiment bubbling just beneath the surface by filing an $89 million lawsuit against IW 50 Best Manufacturer Marathon Oil and its retail subsidiary, Speedway SuperAmerica.

Stumbo's suit charged that Marathon and Speedway SuperAmerica violated Kentucky's price gouging law and the Consumer Protection Act during the state of emergency following hurricanes Katrina and Rita in late 2005. The suit stems from a 2005 investigation of Speedway SuperAmerica for alleged gasoline price gouging, and made Kentucky the first state in the nation to file a price gouging suit under a new consumer protection law against a major oil company.

The Houston, Texas-based oil refiner immediately countersued in an attempt to move the case to federal court; however, that strategy was denied repeatedly in the ensuing months, and the court proceedings have been moving forward in state court ever since, with a verdict likely in 2008.

According to executives, Marathon intends to make a courtroom stand against what it sees as an "extremely vague" law. "We are very disappointed with the actions taken by the state of Kentucky, and Marathon will vigorously defend itself in this enforcement action," said Gary R. Heminger, Marathon executive vice president and president of refining, marketing and transportation operations. "Our goal each day is to provide our products at a competitive price at each of our retail locations. We have a 100-year history of supplying the Midwest markets with quality products."

In its defense, Marathon believes that the law Stumbo cited in bringing suit is not only unclear, but is unconstitutional. According to the company, even Stumbo himself has stated the law on price gouging is unclear.

However, in a jury trial with an oil company defendant in the cash-strapped Rust Belt, one thing is very clear -- the tide of anti-oil company sentiment was due to gush forth sooner or later, as consumers and their elected representatives seek to tap into the record revenues from this manufacturing sector.

Marathon Oil Corp.
At A Glance

Marathon Oil Corp.
Houston, Texas
Primary Industry: Petroleum & Coal Products
Number of Employees: 28,195
2006 In Review
Revenue: $65.4 billion
Profit Margin: 8.5%
Sales Turnover: 2.11
Inventory Turnover: 13.65
Revenue Growth: 2.60%
Return On Assets: 18.37%
Return On Equity: 44.71

To its credit, the company is taking steps to ensure operational profitability remains high in the increasingly resource-constrained economy coming down the pipe. In October, the company completed its acquisition of Western Oil Sands, one of three large oil sands mining operations in the Althabasca, Alberta area (putting Marathon on par with competitors Shell Canada and Chevron), for approximately US$6.9 billion.

The company also plans to spend $170 million to build a distillate hydrotreater at its 73,000 barrel-per-day refinery in Canton, Ohio, in 2008 to produce ultra-low sulfur diesel. During the same time frame, the company will spend $36 million to upgrade the refinery's water treatment facility to stay ahead of Ohio's standards which go into effect in 2010.

Finally, the company expanded its footprint into both the production and retail of so-called "blended" fuel (in this case, a combination of gasoline and biodiesel). While consumers thirsty for real progress to the post-petroleum economy may scoff at the comparatively slight gains from this particular effort (Marathon's B-2 product, for instance, offers a fairly insignificant blend of 2% biodiesel), these moves mark important first steps for this energy company in regaining crucial consumer trust, and keeping those record revenues flowing into the future.

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