Gas price gouge in full swing

INVERSION PERVERSION: Gas prices continue to climb rapidly in California and San Diego today following a "ripple effect" from a refinery failure in Texas, high oil prices, spot market instability, and other factors that spell doom for California gasoline buyers.

Today, UCAN's survey of San Diego gas stations showed an average countywide price increase of 2¢ over the weekend to a new average price of $2.777 a gallon for regular unleaded, up 19¢ since the first of the month, and 9¢ since last Monday.  Never before in the 10-year history of the UCAN gasoline project have prices been this high, this early in the year.

So what's going on?

Spot gasoline is gas that is sold on the "spot" to oil companies and fuel brokers, who then add ethanol and other pollution-fighting ingredients to produce finished gasoline. The price of spot market gas has surged by more than 25¢ last week. Spot gasoline is essentially surplus gas. After the gasoline is blended, it is made available on the unbranded dealer "rack."

Inversion perversion

Usually, this surplus "rack" gasoline is purchased by small, unbranded gasoline retailers who can buy their gasoline at a significant discount from the wholesale prices charged to brand name dealers. Usually, these, unbranded dealers can buy their gasoline at 10 - 20¢ per gallon less than the brand-name dealers. These very independent dealers are vital to a competitive market because they force the major brands to compete. But when the surplus goes away, or when the price of that surplus increases, the unbranded dealers are knocked out of the market and the annual spring gas gouge is on.

Right now, the majority of unbranded dealers will pay more for their wholesale gasoline after taxes than what the nearest Arco station is charging retail.

This process is called a "rack inversion." In the ten years that UCAN has studied local gasoline markets, we have never seen a rapid price spike that has not been accompanied by an unbranded rack inversion. Historically, rack inversions are tremendously profitable to California's refineries, which profit during times of gasoline shortage. So far this year, California's refineries have seen excellent profit margin increase of more than a dime a gallon according to the California Energy Commission which has reported an increase in refinery margins of a dime in the last month. We predict that these margins will increase as the unbranded rack becomes more inverted in the coming weeks. 

So if you operate a refinery and you have learned after years of doing business that you make money when there are shortages, what are you going to do? Obviously, a smart manager will master the art of managing inventory to minimize surplus. Obviously, it is in your best interest to create shortages.

This is the problem with California's wholesale gasoline market: all of the major competitors are motivated to keep supplies tight. In antitrust terms, this is called a "perverse incentive." At UCAN, we call it "Inversion perversion" and it needs to stop.

UCAN has offered several solutions to preventing inversion perversion. The first is to employ a small group of "refinery cops" through the California C.E.C. These inspectors would be responsible for evaluating whether or not refineries are being shut down for safety reason, or because shutting the refinery down is a money-making opportunity.

The second step is to inject competition into the market. Right now, too few refineries have too much market power. And until the situation changes, consumers will continue to pay too much for their gasoline, no matter how much they cut their consumption.

It is worth noting that at this time last year (see below) gasoline cost $2.53 a gallon, and oil was trading at slightly above $60 a barrel. Today, oil closed at slightly above $60 a barrel, and we are paying 20¢ more per gallon for our gasoline. Until California's politicians grow a backbone and force the oil companies to engage in real competition, we will continue to be victimized by inversion perversion.

Current & Past Regular Unleaded Gasoline Numbers

Monday February 26, 2007

Price today: $2.777

Price last Monday: $2.688

Price on Feb 1: $2.52

Price this day last year: $2.51  (Febraury 26, 2006)

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