Are oil refineries are creating artificial shortages to drive up gas prices?  

In the last week gas prices in San Diego have climbed by almost 10 cents, while oil prices have dropped to a new low of $35 a barrel.

San Diego gasoline currently averages $1.82 a gallon, up almost ten cents in seven days. In the meantime, oil has dropped to $35 a barrel, the lowest level of the year, and down $112 dollars from its all-time high of $147 on July 3, 2008.

We've
talked about the low price limbo, where the Master of the Dance asks
"How low can they go?" but last week that trend reversed itself.

Now its a new dance, called the Contango; with the emphasis on "con."

Contango, in case you didn't know, is where the cost of oil on the futures market oil is higher than the current going rate. Lately, with the oil companies in limbo, some of them were losing money on every barrel of gasoline they sold. For big oil companies, this isn't as bad as it sounds - they need to declare losses to offset the taxes on their horrific profits anyway. The big companies can afford to sell gasoline at a loss because they are selling their own oil to themselves at a "loss." It's a paper loss, but it is a loss nevertheless.

But, for small refining operations that don't own their own oil wells, selling gasoline for less than the cost of the oil required to make the gas is deadly to their profit margins ... especially when the future price of oil is increasing. 

Historically, this is when California refineries employ an often-used strategy that we call "demand and supply." Unlike "supply and demand" where a market economy determines the cost of a commodity, a "demand and supply" economic model uses the time tested method of restricting the supply in order to drive up prices.  Demand and Supply works like this: An energy company demands more money while supplying less product. This is what happened back in 2001 when electricity companies like Enron conspired with each other to create artificial shortages of electricity in California. Many regulators believe that the electric companies learned how to do this from the oil industry, which has learned over the years that competition is bad for profit margins. 

Normally, when the oil industry wants to game the market, it shuts down a refinery for maintenance, or in some cases, the refinery will have a minor explosion that disables it. Obviously, a refinery explosion is a serious event - people can die, and toxins are usually released in the atmosphere. This is why UCAN believes refineries should be monitored more closely for worker and environmental safety (In 2006, UCAN called on the Governor to deploy "refinery Cops" to prevent gouging - see article in SanDiego.com).  We also believe that refineries should be monitored to prevent intentional shut downs that are designed to create a shortage and drive up the price of gasoline and diesel fuel.

In the oil business, intentionally disabling a refinery is known as "lighting the smudge pots."  This is what may have happened a few weeks ago with British Petroleum's Arco refinery in Carson. On December 16th, we reported that Arco had shut down its refinery in Carson, and that Valero had also shut down its refinery. Because of this event, we accurately predicted that gas prices had reached the lowest price of the year and that they would start climbing immediately. Most of the "experts" disagreed with our assessment because oil prices were dropping.

Yesterday, Tesoro announced that it would temporarily halt selling
gas at its SoCal terminals. The original plan, according to Reuters, was to wait until January of 2009 to do this. But Tesoro makes most of its money from buying oil from somebody else and turning it into gasoline. With prices as low as they are, Tesoro's executives announced yesterday that they have stopped selling gasoline in Southern California. In its December 17 announcement, the company cited low demand and low margins as the reason for shutting down. The intent, however, is clear: it is to restrict the supply of gasoline and drive prices up.

UCAN's gas project  has been tracking the oil industry for ten years now. We can't recall a time when three refineries have shut down or refused to sell gas in December. Together, using data from the California Energy Commission,  these three refiners represent at least 22% of California's fuel supply. 

The implications are frightening - together, the temporary closure of the refineries could make for a potential  "perfect
storm" of higher gas prices ... even if oil prices plunge to record lows.