Editor's Note: This analysis was originally posted 2-25-08. As of today, 2-26-08, the price for gasoline in San Diego County has increased another 3¢ to a new regional average of $3.38 a gallon for regular unleaded.

Today, gas prices reached an all-time record high for any February in San Diego history. According to UCAN's gas project at www.fueltracker.com, local gas prices now average $3.35 a gallon, up 3¢ since Friday afternoon, and up more than 19¢ in one week.

Current price of gasoline does not reflect the cost of $100 bbl oil.

Last year on this day, gasoline cost $2.71 a gallon and oil cost $1.45 a gallon ($61 a barrel). Today, oil costs $2.35 a

gallon ($99 a barrel) source: Energy Information Agency.

What this means is that while San Diego gas costs 64¢ more per gallon than it did last year, the oil in that gallon of gas is now selling for 90¢ more per gallon.

Unless sanity returns to global oil markets soon, the cost of a gallon of gas is likely to continue climbing. It should be noted, however, that is takes at least 90 days to turn oil into gasoline. What's more, the prices quoted for oil on the NYMEX (New York Mercantile Exchange) are futures prices, or the price someone has agreed to pay at some time in the future. Nevertheless, panic and greed have driven the spot price of surplus gasoline through the roof, and we are paying tomorrow's price for today's gasoline.

Adding fuel to the fire: the cost of bulk fuels has surged

On January 22 of 2007, spot fuel, sold in Los Angeles, was selling for $1.99 a gallon. This morning it was selling for $2.81 a gallon. (Taxes on a gallon of San Diego gasoline are about 63¢). Historically, a high spot price means high street prices.

How the spot market for gasoline works

By way of explanation, spot gasoline is essentially surplus fuel that is sold "on the spot" at a specific price.

Usually, this surplus is sold to brokers who resell it to unbranded gasoline stations. Because the fuel is surplus, it is often available to the unbranded dealers at a price that is far cheaper than the "rack" price that a brand-name dealer must pay.

As of this morning, the breakeven point for an unbranded dealer after he pays state and federal taxes is $3.50 a gallon - a price that is almost 10¢ a gallon higher than the current average price in San Diego.

This effect, known as a "rack inversion" is almost always a harbinger of jumps at the pump. The reason for this is that the unbranded independents are the toughest competitors in California. When they are priced out of the market, the major brands can, and will, raise prices quickly ... and that is exactly what is happening now.

Supply and demand are out of sync

What's remarkable about the incredible surge in spot prices for fuel is that according to the Energy Information Agency, refinery activity is up, and "gasoline production could increase from 100,000 to 200,000 barrels per day over last year's level." In other words, the outlook for a plentiful supply of gasoline this spring is good. According to oil analyst Jim Ritterbusch, finished gasoline inventories are at their highest level in 14 years.

We know demand for gasoline is down. We know that the supply of gasoline is at a near record high. Yet the price keeps going up. In a competitive market, a surplus of fuel would usually result in cost-cutting and increased competition, but not when it comes to gasoline.

At UCAN, we have frequently observed that when it comes to the energy industry, there is no "law of supply and demand." If there was, our gas prices would be dropping like a box of hot rocks on news that consumers are buying less gas in a market that is literally hemorrhaging surplus fuel.

UCAN's prediction:

On February 2, (Groundhog Day), UCAN's "Big Oil Hog" stepped out of the shadows and made a very strange, and cynical prediction. Namely, that gas prices are driven by politics, not oil prices, and that immediately after the Super Tuesday Primaries on February 5, gas prices would scream toward new record highs in California.

The Big Oil Hog also made another prediction: That gas prices would plummet before the presidential elections in November.

So far, the Oil Hog has proved prescient: On February 2, gas prices were $3.03 a gallon in San Diego. On Primary Election Day, they started to climb to record levels, to what is now the highest price in any February in history. And the bad news is, it's going to get worse ... at least until about 60 days before the next election ... when the oil companies will undoubtably lower the price in a effort to lower the political heat. In the meantime, consumers will continue to pay more for their gas while using less.

To see a UCAN opinion piece on the relationship between politics and oil prices, click here.