Pacific Oil Case Study

Pacific Oil Company

       Pacific Oil Company was founded in 1902 as the Sweetwater Oil Company of Oklahoma City, Ok.  Sweetwater pioneered a major oil strike in northern Oklahoma that lead to the black gold rush of the 1900’s.  Hutchinson expanded the company rapidly in the 20’s and 30’s and renamed the company Pacific Oil Company.  Much of their oil is sold as gasoline under the Pacific name in the United States and Europe.   They are also one of the best known producers on industrial petrochemicals.  One of the petrochemicals is vinyl chloride monomer that they produce it is usually produce from coal gas.  This is the primary component in a family of plastics know as vinyl chlorides.  

       In 1979 Pacific Oil entered its first major contract with Reliant Corporation for the purchase of vinyl chloride monomer.  The 1979 contract between Pacific and Reliant was a fairly standard one and was due to expire in December 1982.  In 1982 they renegotiated the contract that was expiring with reliant, they was a worldwide shortage of VCM, and after the research that they did they decided they could sell the product at a more favorable price due to the shortage.  Six months after the process began they signed on extension with Reliant this contract was very favorable to Pacific Oil and signed on October 24, 1982.  

           In December of 1984 Fontaine and Gaudin sat down to look at the all the chemical contracts for their end of the year review.  They were looking at projections provided to them for the next ten years and the tight supply of VCM, was going to turn into more of a surplus.  The contract that they had negotiated with Reliant was made when the market was tight, with the current projections of more VCM some of Pacific’s competition had announced plans in the next to construct manufacturing plants in the next 20 to 30 months.  Both Fontaine and Gaudin both knew that Reliant was most likely aware of the situation and decided they should setup a meeting with Reliant to resign their contract before some of Pacific’s competition tried to offer them VCM at a more favorable price. Once they met with Reliant they decided to reopen negations on the current contract that was in place and to expand beyond the end of the current contract.  When Pacific and Reliant met on March 10 Reliant felt that Pacific’s basic formula on VCM was fair they did not know if that would remain competitive in the future.  Zinnser had already been in discussions with Pacific’s competitors that had plans to open VCM manufacturing plants in the next 20 to 30 months.  They wanted to make sure that Pacific could remain competitive in the marketplace.  By May 15th they had agreed to a formula price and Pacific thought they would have this wrapped up and signed quickly.  They met on May 27th to discuss the other term of the contracts that Reliant wanted to discuss, they did not want to make a long term commitment if the Market for VCM was going to be as volatile as it had been.  Pacific assured them that if the price changed in the marketplace they would work with them to adjust their price and they agreed to a three year contract extension.