Oil Is Down, So Why Is Gas Going Up?

Sept. 14, 2008— -- So how do oil prices fall but gasoline prices rise in many parts of the country?

One explanation offered: with 15 refineries that consume nearly 4 million barrels a day shut down, there is less demand for oil. Less demand means that prices drop.

That, combined with the belief that oil platforms in the Gulf of Mexico were probably spared Hurricane Ike's wrath (though the judgment is a bit premature since oil companies are just starting to evaluate oil platforms for any damage), leads oil traders looking to future months (October, November) to expect that the oil industry will come through this storm with less damage than expected.

And while OPEC recently said its members would only produce what they are supposed to produce, meaning a reduction of nearly 500,000 barrels a day in world supply, Saudi Arabia quickly gave a wink and a nod to oil markets, indicating it would keep on producing more oil, which happens to be about 500,000 barrels a day.

With that, oil prices in the end did not rise but dropped.

In the short term, however, with gasoline inventories at their lowest levels in eight years, and with those refineries shut down, and pipelines that push the oil and gasoline to the Midwest and East Coast shut down or operating at reduced capacity, and then drivers making a run on the gas stations (when they weren't worried about making a run on their bank, but that's another story), there's a genuine concern that gasoline prices could shoot up in the short term.

Already, we've seen price surge in many parts of the country. Wholesale gasoline prices shot up nearly 40 percent one day last week, described to me as the biggest one-day jump since the Arab oil embargo in 1973. So for those gas stations that need to buy gasoline now to make up for dwindling supplies, they will be paying a lot more and in turn, they will charge drivers a lot more.

The question is, for how long. The longer those refineries are out of commission, the longer gas prices will stay high.