Oil prices have crashed by almost 50% since their peak of $147 in intra-day trading in early July, but gasoline prices have only dropped by about 25% in San Diego, according to UCAN, the Utility Consumers' Action Network.

According to UCAN, the current average price of gasoline in San Diego is $3.45 a gallon, as of Monday, October 13 - down 16¢ in the last 14 days.  Diesel averages $3.71 a gallon, down 35¢ in the last two weeks.

Even industry sources, such as the Lundberg Report have observed that gas prices have dropped at the fastest rate in the last 60 years. While this fact may be true in terms of pennies per gallon, it is not necessarily true in terms of percentage of decrease ... something we'll explore at this Web site later.  There are three reasons why gas prices are dropping more slowly than oil prices:

1) The people who were gaming the futures market can't afford to do it anymore - We are seeing Capital Flight out of oil. The gamers need the cash to cover their over-leveraged investments. As the first J.P. Morgan said after the Crash of 29, "Somebody asked for their dollar back."  Those dollars have been pulled out of oil to stop a run on the investment banks.

2) Demand Destruction. The price got so high that demand actually turned "elastic" meaning that people actually responded to gas-gouging by purchasing less gasoline.

3) The elections. On February 2 of this year, UCAN predicted that consumers could expect to  see sharp price decreases before the elections ... just as we predicted in 2006. We were right. Again.  Although we certainly didn’t expect a full-bore economic crash to occur as well!

World oil prices have dropped by over 50% since its peak of $147.00 in July of this year.   This past week, oil is trading at about $70 per barrel. So one would reasonably expect a comparable price drop for gasoline.   Yet, gasoline prices in San Diego have only dropped by about 27%.  (from $4.61 per gallon to $3.35 per gallon).    So should San Diego drivers be suspicious that gasoline prices have not tracked the oil price drop? 

The answer is yes.......and the most revealing and damning statistic that supports that suspicion is the fact that in August 2007 when world oil prices were at $71 per barrel and the average price of gasoline in San Diego was $2.71.    And based upon the historical spread of between the refined price of gasoline and the at-the-pump cost for gasoline,  UCAN estimates that the price of gasoline should be closer to $2.68.    So based upon historical prices,  gasoline prices should have dropped 42%, rather than 27%.

If one digs just a little deeper into these  numbers and statistics and even more disturbing fact pattern arises.   As slow as gasoline prices are to follow world oil prices,  the converse is NOT true.  Gasoline prices generally rise faster than the price of oil.   When gasoline prices shot up to the record of $4.61 per gallon on June 19, 2008,  oil sold for $131 per barrel.   A few weeks later, oil hit its high of $147 per barrel, but gasoline prices in San Diego has dropped by 5 cents to a $4.55 average. 

San Diego consumers are justified in concluding that Newton's law of gravity is defied by the gasoline markets in California.   Indeed, the rate at which this particular body goes up is distinctly different from the rate by which it drops.   Sir Isaac Newton probably could not have tackled this seemingly impossible law of economics.....because he was a physicist.    But his 18th centruy contemporary,  economic philosopher Adam Smith, had figured it out  perfectly.    Markets,  Smith opined, don't function properly in the absence of meaningful competition or effective government oversight.   Given the very anemic state of competition in California -- a mere three major oil companies dominate the gasoline markets -- it would be fuelish to rely upon the invisible hand of competitive market to bring gasoline prices to their proper and justifiable levels.   So the task falls upon government oversight to serve as the enforcer of market rules.

Now the word "oversight" is a tricky one in the Engish language as it has two opposite meanings.   One meaning refers to supervision or watchful care.   The other meaning is the careless failure to notice or consider.   Both the California and Federal government agencies charged with oversight of the oil and gas industries have chosen to adopt the latter definition -- they have been careless, if not willful, in their stubborn refusal to scrutinize the oil industries.   And, as consumers are painfully realizing as they watch the Americans financial industries thrash in illiquidity,  flawed government oversight leads to costly consequences.    As with the financial sector,  the oversight of oil industry oversight by government leads to a gasoline prices that defy laws of economics (as well as physics).

Put simply,  San Diegans are overpaying for gasoline by about 67 cents per gallon -- or about 20%.   This 67 cent per gallon "tax" paid by drivers can be viewed as the cost of failed Federal oversight of the industry.   And just to add some blackness to this dark cloud,  San Diegans are paying another 10% more than they should because of the deficient oversight of the California retail markets.   This is evidenced by the fact that California gasoline prices tend to be 10-20% higher than gasoline prices of neighboring states, even after factoring in the difference of state gasoline taxes.    Indeed,  this month Californians are paying an average of $3.36 while Arizonans are paying about $3.00 and Nevadans are paying $3.20 for that same gallon of gasoline.   So the penalty paid by California of lax oversight is closer to 30% when one considers Federal and State regulatory deficiencies.

Effective scrutiny of the gasoline refiners and dealers in California would, at a minimum,  force these companies to explain the discrepency between past gasoline prices and current prices.  And the threat of effective investigation would substitute for the absence of price competition and push the price of gasoline to where it should be.   But alas, neither scrutiny nor investigation are part of the language spoken by California or Federal overseers.  And consumers -- once again -- pay the price.   File this one under the category of "Another Costly Lesson in Regulatory Bumbling".

For  information, contact Michael Shames, or Charles Langley, Gasoline Project Manager, at 619-696-6966..