By Charles Langley - Manager, UCAN Gas Project - Prominent analysts are saying that gas prices will likely spike even higher in the coming weeks because of the earthquake in Santiago Chile, which has destroyed three major refineries. Our very own Crude Reality blogger, and oil industry analyst, Bob van der Valk, has been quoted in today's Union Tribune, the North County Times, and Businessweek.
At issue is the fact that California will likely be shipping refined fuel to Chile. “The U.S. West Coast refineries, which have already been large fuel suppliers to Chile in the past, will now be taking up the slack,” says van der Valk. Chile's state-owned oil firm, ENAP, owns three refineries with a capacity of 225,000 barrels a day. All of them were closed due to the earthquake. However, the massive weekend price spikes we documented here at UCAN had nothing to do with Chile - the price hikes for Southern California were already in play prior to the Chilean quake (see our comments at UCAN).
Today's price hikes were in the pipeline two weeks ago.
Since February 15, the spot market price* for raw gasoline in Los Angeles has jumped at least 25 cents, yet the street price of gasoline has only increased by a nickel, on average during the same time period.
As of Monday, the average spot price for gasoline was the same as the average wholesale price for brand-name dealers. If this parity continues, prices will go up even without exports to Chile or elsewhere.
Big Oil's Big Lie - "There isn't enough gas to go around."
What is especially repugnant about the exports to Chile is that for the last twenty years, the oil industry has claimed that San Diego pays the highest prices in the nation because there just isn't enough gasoline to go around.** They claimed that all of California's refiners were working hard to produce anough gasoline to meet demand. Now, in 2009, the oil industry has been mothballing its California refineries to avoid over-producing. Apparently, demand has dropped so much that the industry has been producing too much gasoline.
The Law of Demand and Supply.
Which brings us to Langley's Second Law of Gougeonomics, which asserts that in a gougeonomy, the fundamental laws of supply and demand do not work. Instead, the market consists of a "Demand and Supply" scenario, where vendors demand more money for their commodity while supplying less of it.
One of the best ways to do this is to create shortages by making less gasoline and by dumping surplus fuel in other countries to keep it away from the USA market. There is nothing new about this strategy. Arco has been doing it for years - often dumping fuel at a loss in overseas markets simply to keep prices high in California. Dumping refined product (in places like Chile, for example) keeps supplies tight and gas prices artificially high. Late last summer, it was announced that three major California reneries were about to be mothballed due to a lack of demand.
And that means everybody profits. ... or at least everybody in the industry profits.
As for you?
You'll pay more for less gasoline in keeping with the Second Law of Gougeonomics.
And that's why the tragedy in Chile is an excuse for high gas prices, not a reason. If the market was competitive gas would be cheaper. As it is, refineries are able to limit supply even when the market is oversupplied by dumping it in overseas markets.
By exploiting the laws of Demand and Supply, Big Oil can demand more money by restricting the supply.
* The spot market is surplus gasoline that is sold to unbranded gas stations. Typically, spot gas costs ten to 20 cents less than the same gasoline sold to brand name retailers.
** They have claimed that we have high gas prices because whining environmentalists have blocked all new refinery construction for thirty years. Not true. The reality is that the industry hasn't made a serious effort to build a new refinery because it has been easier to add capacity to existing refineiries. (see "Pump Price Fairy Tales" by Peter Van Doren and Jerry Taylor at the CATO institute).