Editor's Note: This legislation has since been passed into law. Another small victory for consumers. Today, UCAN sent a letter of support for U.S. Senate Bill S1263, the Petroleum Consumer Price Gouging Protection Act. The bill is an attempt to curb manipulative practices in the wholesale gasoline markets by enacting new civil and criminal penalties for companies that break the rules. Under the legislation, the Federal Trade Commission (FTC) could conduct investigations and fine companies for price gouging. The specific definition of price gouging would be determined through FTC rulemaking.

We've named this dog "SPOT" for the spot gas market. Manipulation of the spot market can create gas price spikes.

The most important aspect of the bill is that is targets gasoline suppliers instead of retailers who are generally limited to a 5 to 10¢ per gallon profit thanks to the oil industry's practice of continually raising the prices that are charged to high-volume dealers. This legislation makes it unlawful for suppliers to disseminate false or misleading information with the intent of gaming the wholesale market.

In California, which is arguably the most important gasoline market in the USA, refiners have repeatedly posted record-breaking profits even though oil prices are lower. Meanwhile, California's gasoline prices have breached all-time record highs, while refineries have reaped horrific profits.

What S1263 addresses is the fact that a false rumor about a refinery can blast the wholesale price of gasoline straight through the roof in a matter of hours. In California, and elsewhere, a minor refinery glitch can send shockwaves through the spot delivery market for gasoline, forcing prices higher on the street in as little as 24 hours.

Here's why the spot market is so important:

Spot gasoline, or "CaRBOB" is essentially surplus gasoline. This gasoline is purchased by small independent fuel brokers and jobbers who distribute to their customers after taking a nominal mark-up for mixing and delivery. Frequently, these small wholesalers can offer gasoline at prices that are 10 to 20¢ less per gallon than the prices charged to brand-name dealers. Unlike gas stations that are franchised or owned outright by the major refineries, independent dealers are aggressive cost-cutters. This tiny segment of the market maintains what we call the "price floor." However, when there is a problem at a refinery, or even the rumor of a problem, the price of spot delivery fuel will often skyrocket, raising the price floor by as much as 25¢ in a week.

What refineries have learned is that a shortage of fuel on the spot market eliminates their most aggressive competitors. What this does is create a perverse incentive to raise prices instead of lowering them because of a lack of competition and a deliberate effort by the American oil industry to maintain tight supplies (see our March 26 commentary: The price of oil and the price of gas: No correlation).

Yesterday, for example, the spot market for gasoline in Los Angeles surged by 15¢ in a single day of trading after rumors that Exxon/Mobil's Torrance refinery was having problems. In all probability, this was a minor problem, which has come on the heels of planned maintenance (see May 2, 2007 Marketwatch), but just the rumor was enough to wipe out the profit margins and competitive pricing of thousands of independent dealers out of fears that Exxon would begin buying up spot barrels in order to satisfy the demand from its own dealers. In the process, every other major gasoline company is no doubt hoping beyond hope that Exxon's failure will drive the value of their existing inventories even higher.

This year, California and the nation have been afflicted with countless refinery woes that have allegedly crippled the nation's capacity to produce gasoline. Many of the reasons given for the outages that have caused high prices and market panics are highly suspicious. The most outrageous example happened on March 1, when Reuters reported that a raccoon took out a massive refinery in Torrance, causing huge price spikes in the following days. (See our Blog, the Fine Print).

If that sounds like a shaggy dog story to you, you're not alone. The Senators who crafted S1263 are thinking that too.

Click here to read the letter (pdf format) that we have sent to the Senate.