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By Robert Rapier on Jan 23, 2008 with no responses

One Confused Economist


This story baffles me.

High fuel prices are puzzling

The middlemen who buy and sell fuel on the wholesale market have seen Los Angeles gasoline prices plunge more than 50 cents in the last two weeks.

Too bad drivers aren’t seeing the full benefit at the pump.

On Friday, the most recent trading day, the wholesale gasoline price in Los Angeles hovered around $2.17 a gallon — a figure roughly equal to a retail price of $2.77 a gallon after taxes and other costs were included.

OK, let’s set the scene. The wholesale market would be where refiners sell their fuel to jobbers and such. The jobbers then turn around and sell the fuel to gas stations. Now here is where the story gets bizarre:

But on Monday, service stations in the city were selling self-serve regular for an average of $3.221 a gallon. Consumer advocates and others smell a rip-off. As proof, they note that a few California refiners have reacted by cutting production, shutting down early for maintenance and lining up exports in an effort to shore up wholesale prices.

“The California economy has been penalized by high gas prices for months, and now, when the opportunity comes for a brief window of significantly lower prices, the workings of the market are being frustrated,” energy economist Philip K. Verleger Jr. said. “The people who own refineries are doing everything they can to prevent [the declining wholesale price] from trickling down to the consumer.”

Now hold on a second. Didn’t the story just say that wholesale prices had plunged? Refiners don’t own the gas stations (less than 5% of the retail gas stations are owned by major oil companies). I am surprised that someone like Philip K. Verleger would make such an uninformed statement. Refinery margins have been horrible for several months now. Why on earth wouldn’t they shut down early for maintenance, or find export outlets?

For crying out loud, Verleger is supposed to be an economist. The fact is, refiners have not been successful at keeping wholesale prices up – the wholesale price has plunged. So tell me, how exactly are the refiners culpable here for the high retail prices, when they are selling their product at a low wholesale price? Maybe Verleger was misquoted. That’s the only explanation I can come up with for what seems like a serious misunderstanding of who benefits when wholesale prices are low and retail prices are high.