Oil Is Down, So Why Is Gas Going Up?

You may think it's price gouging, but oil companies have a less sinister answer.

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.

Or so say the gas stations and industry folks.

Attorneys general and consumer groups around the country, on the other hand, are crying foul, saying it's price gouging. Proving that, however, has been difficult in the past.

The Federal Trade Commission studied price increases in the wake of Hurricane Katrina and reported: "The Commission also examined gasoline prices after the hurricanes to search for any instances of price gouging as defined by that legislation. In its examination of price-gouging evidence, the report analyzed financial data for 30 refiners, 23 wholesalers, and 24 single-location retailers.

"The report found that 15 of these firms – seven refiners, two wholesalers and six retailers – had higher average gasoline prices in September 2005 compared to August, and that these higher prices were not substantially attributable to either higher costs or to national or international market trends. Accordingly, there was evidence of price gouging, as defined by Section 632, for these firms. Additional analyses, however, showed that other factors, such as regional or local market trends, appeared to explain the pricing of these firms in nearly all cases."

And in May 2007, the chief economist for the oil industry association, API, testified before Congress: "Our industry has been repeatedly investigated over many decades by the Federal Trade Commission and state attorneys general. Of the more than 30 investigations that we are aware of, all have resulted in exoneration."