Gas Prices: Why Won't They Drop?

May 10, 2011 -- As the petroleum market spins its wheel of fortune daily, drivers can't seem to catch a break. Crude prices had been headed for the moon, then they crashed 15 percent last week, taking the worst weekly price beating since 2008.

Oil made up a bit of that ground on Monday, but at the pumps drivers have seen no relief from last week's tumble in crude oil prices.

The pump price of gasoline, also up slightly Monday, continues to wander around like a child lost at the fair, seemingly unattached to the price of crude.

You could say we were in the petroleum funhouse -- only it isn't fun. Motorists, whipsawed by prices, are fuming.

Brian, a freelance photographer from Pennsylvania who asks that his last name not be used, calls the oil companies "opportunists" and "profiteers." If there were any real shortage of gas, he says, you'd see gas lines. But you don't.

"There's plenty of gas, assuming you're willing to pay the price. These guys buy gas cheap and hold it; then they run the price up and sell it high. Then they run it back down again. It's a racket. It's fixed," said Brian. "If there's a shortage of materials in my business, I have to pay more and make less. They pay less and make more. They're economic terrorists."

Brian recently drove from Philadelphia to Rhode Island and back in about 10 hours -- a trip of 500 miles. "All the way, I could see the station prices changing constantly, going up." He paid $4.50 on average. According to the Department of Energy today, gas prices nationally have risen to a little less than $4 a gallon on average. Regions with the biggest price increases from a week ago included the lower Atlantic states and the West Coast (minus California).

Patrick DeHaan, senior petroleum analyst for GasBuddy.com, which tracks gas prices coast to coast, admits the fluctuations in the pump price of gas are "very difficult for people to understand." He explains why the recent decline in the price of crude didn't translate into cheaper gas: "The bottleneck is the refiners -- the middlemen."

At the same time that inventories of crude are increasing, inventories of gasoline are dropping. "For 10 consecutive weeks gas inventories have been dropping -- and now we're headed into the big summer driving season."

Result: No price break for consumers.

Add to this a cresting Mississippi and some unfortunate accidents of timing. A number of U.S. refineries were closed a year ago, when the price of gas was lower and refining was less profitable. Getting them back online takes time. They can't just be restarted with just a snap of the fingers. An electric power failure two weeks ago in Texas knocked out 4.4 percent of U.S. refining capacity. And the rising Mississippi threatens to close refineries in the Gulf. All of this puts upward pressure on gas prices.

Oil industry expert Andrew Lipow -- no conspiracy buff -- calls this simply "a confluence of events": We've got crude aplenty, he says, but a diminished capacity to turn it quickly into gasoline.

In ordinary times, there'd be a lag of about two weeks between a change in the price of crude and a corresponding change in the price of gas. But these are not ordinary times. The two prices are not moving in their normal relation, owing to the refining bottleneck.

Gas Prices: Why Won't They Go Down?

We asked Lipow: Let's assume we were talking about a bakery, not the gas business. If the baker's price of eggs and flour drops, consumers could expect to see markdowns on the cakes -- right? Right, he agreed. Unless the bakery's oven were broken -- which, he says, is the right analogy for what's going on in refining. "If the oven ain't working, you can't bake the cake." Too few cakes mean prices don't go down.

There's another complication at work, says DeHaan: Gas station owners respond one way when the wholesale price of gas is rising, but a different way when it falls. "Stations are quick to raise their prices at the pump. They do it in anticipation that they themselves will have to pay more for their next wholesale load. Today's owner is looking at the numbers and seeing that the wholesale price is up maybe 20 cents a gallon. If he's going to have to buy 8,000 gallons, that's $16,000. Where is he going to get that? He can get it by raising retail prices quickly."

Station owners don't make their money when prices rise, says DeHaan; instead, they try to keep prices in check to compete with other stations. "But when prices drop, that's where they make their money. It's an unwritten rule in the industry: when prices start to fall, owners don't undercut each other. They keep the prices high for as long as they can, because that's where they get their profits."

Out in bucolic Sausalito, California, the local Shell station today was selling regular for $4.36, premium for $4.56, according to David Labua, author of "Finding the Sweet Spot: The Insider's Guide to Parking in San Francisco." Labua, whose office is on a Sausalito tugboat, has devised his own highly novel way for combating higher fuel costs: Spending less time driving around to find a parking spot. His is a fittingly Californian solution: the driver slows down spiritually, puts aside all other distractions, and devotes his entire karma to finding parking. Readers have reported enough success that Labua is now planning editions for Boston and New York.