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To see an overview of how oil refineries in California manipulate retail prices, click here.

Oil prices scream past $120 a barrel as local gas prices drop.

Today, with oil trading at more than $120 a barrel, San Diego gasoline prices actually dropped by slightly more than a penny, on average, since last Monday. Diesel prices edged lower, too, dropping three cents in the last week (see statistics below).

Unfortunately, the downturn is likely to be short lived. Since this morning, the LA spot market, which drives wholesale prices surged in sympathy with high oil prices to $3.14 a gallon at noon, up from $2.96 a gallon on May 1, 2008. The price hikes are occurring even though there is a surplus of gasoline on the market.

Why would gas prices drop when oil is at record levels?

The simple answer is that consumers have been gouged so deeply that they are unable to pay the current price. Earlier this year, refineries reacted to lower consumer demand by cutting back supply. Just like the electric crisis of 2000 and 2001, oil companies have learned that by restricting supply, they can keep gasoline prices at artificially high levels. According to the California Board of Equalization, which collects taxes on every gallon of gasoline and diesel sold, demand is the lowest it has been in 16 years.

Demand for gasoline has dropped significantly. and refineries have overproduced, creating a surplus for spot gasoline on the LA market. Spot gasoline is surplus fuel that is traded between refineries and also purchased by independent fuel brokes and jobbers who pay cash on the "spot" for delivery.

If an oil company is able to manipulate the spot market, it has the ability to game the market. There are two ways to do this: the first is by intentionally creating shortages by shutting down refieneries or exporting fuel overseas or out-of-state, and the second is by panicking the spot market.

This spot fuel is ultimately sold to consumers by unbranded independent dealers. These unbranded dealers tend to be the most competitive players in California's retail gasoline markets. Because they are the most competitive, the these independent stations represent the retail price floor in California - and when their prices go up - the major brands are free to raise their prices, too.

Last week's price cuts were prompted by a massive 18¢ drop in the spot price of fuel between Thursday, April 24, and Thursday, May 1.

Today, the average price of retail gas in San Diego is likely to rebound as high oil prices drive the price of spot market fuel higher.

Statistics: (Today / Last Week / Last Year )

Price of regular gas today: $3.907 gallon

Price of diesel today: $4.415 a gallon

Price of oil today: $120.3 a barrel or $2.86 per gallon of gasoline

Price of regular gas this day last week: $3.918 a gallon

Price of diesel this day last week: $4.44 a gallon

Price of oil this day last week: $118.75 a barrel or 2.82 per gallon of gasoline

Price of regular gas this day last year: $3.403

Price of diesel this day last year: $3.084

Price of oil this day last year: $65.20 a barrel or $1.552 a gallon.