Valero admits to intentionally restricting gasoline supplies

Today, gasoline and diesel prices surged to new record highs in San Diego County thanks in part to an  intentionally created shortage by one of California's top refiners.

According to UCAN's Gas Project, the price of regular unleaded gasoline now averages $3.80 a gallon in San Diego. The new record-breaking price is 12¢ higher than this day last week, and 19¢ higher than this day last month. Gasoline now costs 77¢ more than it did on January 31, when the price was $3.03 a gallon - the lowest so far this year.

Diesel prices continue to move into upper realms of unaffordability with a new average today of $4.34 a gallon - up 84¢ since January 31, 2008, and $1.22 more per gallon than this day last year.

Today, the cost of the oil in a gallon of gasoline is $2.62 a gallon, or 70% of the retail cost of a gallon of gas. Last year on this day, the cost of the oil in a gallon of gas was $1.51 or 45% of the retail cost of a gallon of gasoline. (Source: UCAN original research and EIA oil price history).

 What this means is that refineries are making significantly lower margins today than they got used to making last year. Part of the problem is that consumers and businesses cannot afford to pay the current high price for diesel and gasoline. As a result, customers have stopped buying. This has created a surplus of fuel. In a free market, a surplus of fuel would mean lower prices. Unfortunately we don't have a free market in California. Prices are tightly controlled by refineries that have mastered the art of creating the perception of a shortage just as the price of fuel begins to normalize.

If the refineries decide they need to make more money, they will shut down capacity to restrict supply and drive up the price of fuel. This is what normally happens during the annual Spring Gouge Season for gasoline. And that's what happened last week.

In fact, it is exactly what Valero Energy did last Tuesday, according to the report below from OPIS, the Oil Price Information Service. Note the underlined text - what Valero is saying is that they are not making enough money on a gallon of gasoline, so, in order to boost prices, they are creating a small shortage by underproducing gasoline. This small shortage of gasoline (far less than 2% of the State's supply) was enough to push local prices 9¢ higher in one week.

2008-04-08 09:49:52 EDT
***REFINERY UPDATE: VALERO WILMINGTON RESTARTS FCC
   Valero's 135,000-b/d Wilmington, Calif., refinery began the restart of a
fluid catalytic cracker (FCC) during the weekend, spokesman Bill Day told OPIS.
The unit was shut down for repairs on March 27, along with the alkylation unit
that was restarted last week. Day said Valero is not running the FCC at full
operating rates due to current market conditions.
   Citgo's refinery in Corpus Christi, Texas, began the restart of a coker unit
today after scheduled turnaround maintenance, according to a filing with the
Texas Commission on Environmental Quality (TCEQ). The unit is expected to be
operating at capacity by April 15.   --Sheena Martin, smartin [at] opisnet [dot] com

Adding fuel to the fire for high diesel prices, British Petroleum/Arco reported a flaring incident on April 10 for its diesel hydrocracker unit, which produces 45,000 barrels of diesel a day.

 Source: OPIS, April 11, 2008

... In other news, last night, BP reported a flaring incident at the 265,000
b/d Carson refinery in Southern California. The filing with the state did say
that a fire was extinguished within ten minutes.
   A loss of a compressor has forced the major to take down a 45,000 b/d
hydrocracker, sources familiar with operations at the refinery say. There was
a small fire in the compressor as well, but was put out relatively quickly and
it was believed that the fire did not cause damage to the equipment. One of
the seals on the compressor needs to be repaired and once an inspection of the
unit happens a restart could be attempted. Sources say the hydrocracker could
be back in operations as soon as Monday.
REFINED PRODUCTS...
   Diesel markets were moving up late in the day as buyers came into the
market looking for barrels. The turnaround in basis was tied to the loss of a
hydrocracker at BP's 265,000 b/d Carson refinery. Meanwhile, CARBOB premiums
pulled back a bit more, but with a late rally on the screen, cash market
losses were on the lighter side.

Price Manipulation or "Inventory Management?"

UCAN has questioned the necessity of some shutdowns. We believe that the California wholesale market for gasoline is so anti-competitive that refineries can manipulate the market at will by restricting a small fraction of their supplies through refinery shutdowns or other means. These actions help maintain profitable inventories, and prevent losses from money-losing supplies of surplus gasoline.