Gas prices dropped a penny since Friday, contrary to expectations, suggesting an economy with one foot in the grave.

Gas prices dropped a penny over the weekend in San Diego, contrary to predictions we made on Friday that gas prices would increase by noon today (Monday, September 29, 2009). Our predictions were based on the fact that two major refineries in Southern California caught fire. Virtually every analyst who studies gasoline prices made similar predictions because the two refineries, which supply Southern California, represented more than 17% of all gasoline manufactured in the entire state (see our original prediction from Friday below).

Under normal conditions, one refinery fire would be enough to make local gas prices surge, but these aren't normal times.

The fact that gas prices actually dropped suggests that gasoline sales are flagging at half mast for a consumer and business market that appears to have one foot in the grave. Lack of demand has created a market where local storage tanks that are brimming with surplus fuel. Consumers are simply travelling less - they are either unemployed or cutting back on discretionary travel. In addition, many of us have purchased, or are using, more fuel-efficient cars, changing our gas buying behavior forever. Add to this reduced pressure for jet fuel and lowere demand by businesses that are shipping less product and it creates an enormous resorvoir of surplus gasoline.

When a gallon of diesel costs more than a gallon of milk.

For years the oil industry has assumed that demand for its product is "inelastic," meaning that consumers and businesses have no choice but to shut up and pay up. As a result of inelastic demand, five major U.S. airlines filed for bankruptcy last year, and many other California businesses and consumers were pushed to the brink in the face of $5 a gallon diesel and $4.60 a gallon gasoline.

The oil industry may have been right: Our only choice in the last few years has been to "shut up and pay up" but now, thanks in part to high fuel prices, many of us have been "shut down, and bankrupted."

And perhaps, with a little luck, it will be Big Oil's turn next.

The following Gasoline Buyer's Advisory was published on Friday, September 25, 2009.

Fires will fuel a gas price reversal this weekend.

Oil prices may have dropped by $5 a barrel in the last four days, but your gas prices are about to increase.

Two fires at two Southern California refineries are putting the brakes on what should be a steep decline in the price of retail gasoline.

At 5:00 AM this morning, Tesoro's Wilmington Refinery caught fire. The fire was extinguished by 9:30 AM with no injuries, but it was followed by an announcement by Chevron that its hydrotreater had erupted in flames this morning, too.

The two events have panicked the local spot market for gasoline driving up the price of CaRBOB (California's special pollution-fighting fuel), by twenty cents a gallon.

Together, the two refineries represent 17% of the fuel manufactured in the State of California. The Chevron refinery in Richmond produces 12.5% of California's fuel (about 242,000 barrels a day), while the Tesoro refinery pumps out 98,000 barrels of gasoline each day, or roughly 5% of the gasoline manufactured in California.

"The bottom line is that the two incidents will likely reverse what should have been a weekend of happy news for motorists," says Charles Langley, Manager of UCAN's Gas Project. "Yesterday we predicted that gas prices would drop from four to eight cents by Monday. That isn't going to happen now. In fact, prices could very well go up one to five cents by Monday afternoon, and much more later in the week."

"This needs to be investigated," says UCAN's Executive Director, Michael Shames. "The timing of unplanned refinery shutdowns is cause for suspicion. They seem to occur whenever the price for gasoline is poised to drop."

Local Gas Prices (source: UCAN gas Project at www.fueltracker.com)

(note: the highest average price for gasoline in 2009 was $3.17 a gallon on Monday, September 1. Last year on this day, regular cost $3.62 a gallon and diesel cost $4.08 a gallon).

For more information, contact UCAN's Gas Project Manager, Charles Langley, or UCAN's Executive Director, Michael Shames.