Big Oil uses Zone Pricing to stop gas price wars. Here's how they do it, and what you can expect to see in the next few days...

UCAN predicts that in the next six days a few stations in San Diego will begin selling gasoline below $2.50 a gallon. 

Chainsaw-style price discounting by unbranded gas stations is forcing the major brands to compete. Unfortunately, the oil industry uses a type of redlining called "zone pricing" to prevent the type of high-octane price slides that should be occurring right now as oil prices plummet.

Price redlining by big refineries

"Gasoline in San Diego this morning (Friday, Oct 24, 2008) averaged $3.167 a gallon and it is dropping by the hour." says Charles Langley, Manager of ucan.org's Gas Project. "The market is awash in surplus gasoline," says Langley. "Unfortunately, brand name stations are unable to offer lower prices to their customers because of price redlining by the brand-name refineries."

Two types of gas stations

Generally speaking, there are two types of gas stations - branded stations and independently owned unbranded stations. Dealers who operate brand name stations have no control over their wholesale prices - those are set by the Refinery Pricing Manager for the brand of gasoline that the dealer sells. Most gas stations fall into a specific price "zone" that is established by the oil companies. 

This type of redlining allows Big Oil to curb competition by maintaining high wholesale prices to its dealers. It is also a tool that can contain price wars. As long as all of the major brands charge a high wholesale in a specific zone, profit-harming price slides can be controlled. The practice is also used to limit dealer profits to five or ten cents a gallon, on average. 

Unbranded dealers, on the other hand, buy surplus gasoline. Often, the wholesale price of the surplus gas is much cheaper than the prices offered to brand-name dealers. At this time, many unbranded dealers could sell their gasoline for less than $2.45 a gallon and still make a profit. 

The reason those dealers are not offering low-priced gas is that they don't have to - until the major brands start passing on the benefits of lower oil costs to their retailers, prices will remain high. 

Oil falling, gas prices crawling 

On July 3, 2008, oil peaked at $147 a barrel on intra-day trading. At that time, San Diego gasoline averaged $4.56 a gallon.

Today oil closed at $64 a barrel, with an average local gas price of $3.16 a gallon.  Put another way, oil prices have dropped by 57% while gas prices have dropped by only 31%.

If gas prices were dropping as fast as oil prices, gasoline would average $2.60 a gallon in San Diego County - 46 cents less than the average price of gas this morning. But thanks to zone pricing, gas prices still remain well above $3 a gallon.

For more information contact Charles Langley or Michael Shames at 619-696-6966.