Gasoline supplies are being blatantly manipulated to keep prices high

In this morning's San Diego Union-Tribune, reporter Onell Soto quoted UCAN's Gasoline Project Manager, Charles Langley as saying that “It’s very unlikely we’ll see gasoline below $3 for the next nine months.” Tom Kloza of the Oil price Information Service, a publication that caters to the oil industry was also quoted as saying "Refiners are producing less, and in some cases closing or idling refineries, because they can’t make money if they make so much gas that prices drop."

Translation: Refinery are restricting supply to drive up prices.  Thank you Mr. Kloza. It should be noted that for the last five years American oil companies have been blaming our high gas prices on the alleged fact that there is not enough U.S. refining capacity.  Never mind that this statement is completely false, let's just focus on the fact that refiners are shutting down in order to restrict supply. As we reported in our Fall 2009 Newsletter (available to members), restricting supply is vital to industry profits because it allows refineries to cooperate instead of compete (see gougeonomics below).

Here are five reasons gas prices will probably stay high. 

1) Big refiners are storing fuel to keep it off the market.

In the same edition of the Union-Tribune, this story from the Associated Press says that in the last week, oil companies put 3.7 million barrels of gasoline into storage. Why? to keep it off the market. Demand for gasoline is so weak that refiners have consistently overproduced.

2) California refineries are systematically closing operations to limit the supply.

For the last 110 years, the oil industry has been plagued with the same nagging problem: How to stop competitors from producing too much product?  While surplus may be good for consumers, it is a money-loser for the oil industry. One way to prevent surplus is to limit production. In the late summer and fall of 2009, we saw many California refineries close down in a very systematic fashion. Just as prices were poised to drop, another refinery would announce a closure for maintenance. From our perspective, it appears that each competitor was taking its "turn in the barrel" by limiting surplus through orderly and systematic refinery shutdowns.  The program worked: Each shutdown prevented what should have been a precipitous drop below $3 a gallon.

3) Front-running by large trading houses is keeping oil at artificially high levels.

Obviously, if the cost of oil goes up, the cost of gas will remain high, too, which brings us to the practice of "front running" by trading houses such as Goldman Sachs. Goldman Sachs has computers on the floor of the MERC and ICE (a European exchange created by Goldman) that are so fast that they can execute a preemptive trade micro-seconds before other traders make a purchase on the oil futures market.  This process gives the big trading houses an unfair advantage over other oil buyers. Micro-second trading lets them to manipulate oil prices by programming their computers to react instantly to other trades with a counter trade. 

4) A weak dollar buys less oil.

As the dollar grows weaker from climbing U.S. war debts and the bailout of Goldman Sachs and other investment houses, the number of U.S. dollars required to buy a barrel of oil increases. Ironic considering that we fought the first Persian Gulf War on the basis that Middle East oil supplies are vital to national security.

5) An unusually HIGH average January gas price in San Diego. Could gas hit $4.32 a gallon in 2010?

UCAN's Cheap Gas Locator at fueltracker.com reported a first week average for 2010 of $3 a gallon for regular unleaded. This is only the second time in San Diego history that gasoline prices have exceeded $3 a gallon in the first week of the year. The last time we saw $3+ in January was in 2008 when the price of gasoline surged to $4.63 a gallon.  Alarmed by the potential for high-octane price hikes, we looked at the price of gas at the beginning of the years versus the highest price for that year in San Diego. What we found was alarming: The average increase in the price of gasoline from the January low, to the highest price for any given year was 144%.

Mark Twain said there were "Lies, damned lies, and statistics!" but this is an especially disturbing statistic backed up by eight years of data from UCAN's Gas Project. When we looked at our spreadsheets, this is what we found:

Low vs. High Gas Prices, 2002 through 2009

Average percent of increase, 2002 through 2009 = 1 44.6%

And finally, the biggest reason we expect to see continued high prices is because California does not have a market economy for gasoline. Rather, we have a "gougeonomy" that rewards oil companies for producing less fuel at higher prices.  Learn more about Gougeonomics here.  And if you like what you are reading -- independent analysis that isn't influenced by corporate advertising or oil company sponsorship -- please consider submitting a tax-deductible contribution now.