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It is common knowledge that California's gasoline refineries are able to play the wholesale markets like a cheap piano, and this week's shenanigans by refinery pricing managers are no exception. These shenanigans, otherwise known as "intentionally restricting supply," are responsible for huge volatility in our retail gas price, including the current rapid price chopping by those who set and control retail gasoline prices in California.

Last week, the LA Times outed the oil industry in a story that exposed the fact that the spot market for surplus gasoline was literally dumping fuel onto the market, and that the handful of independent dealers who are able to buy spot gasoline were able to sell it retail for as little as $2.77 a gallon. Meanwhile, the average price in San Diego was stuck at $3.24 a gallon.

Stories like that are the sort of things that get the attention of politicians and regulators, because it suggests that the market is not competitive enough. And the one thing the oil industry loathes is scrutiny by politicians and regulators (see our December 16, 2007 editorial).

After the story ran on January 22, prices immediately began to drop in Southern California. Coincidence? We'll let you decide. Our local gas survey showed today that prices had dropped a breathtaking 7 cents in just 48 hours after publication. What prompted the price cuts? The refineries started giving their dealers a lower price. Unlike independently owned gas stations that are not branded, owners of brand name stations such as Shell or Chevron can't shop around for the lowest price for gasoline. Their wholesale prices are set by the Refinery Pricing Manager, who makes certain that the dealer only makes about a nickel a gallon net profit. Meanwhile, the refinery margins can be as high as $1.40 a gallon.

But when the story ran in the Times, it exposed the industry's incredible greed and the purse strings of the men who set the retail prices in California suddenly loosened.

Don't jump for joy yet - these price cuts are likely to be short-lived.

Earlier this week, two of California's biggest refiners, Shell and Tesoro, announced that they would make huge production cuts in gasoline. These cuts have panicked the spot market, making cheap fuel scarce. By way of example, on Tuesday, when the LA Times ran its story, the price of spot fuel was $1.99 a gallon. Today, thanks to the intentional gaming of the refineries, the price closed at $2.23 a gallon.

So even though the spot market has done a belly flop, after dropping like a brick from the clear blue sky, chances are high - very high - that gas prices will be screaming back to even more painfully unaffordable levels soon.

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