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.

7 thoughts on “One Confused Economist”

  1. “The people who own refineries are doing everything they can to prevent [the declining wholesale price] from trickling down to the consumer.”

    There were reports during the last real crunch that it wasn’t so much the price as who would actually deliver to you.

    The few(?) independent stations may be kicking themselves now if locked into some arrangement that prevented them from buying at the jobber price.

    Really anyone, independent or not, is going to have costs sometimes above and sometimes below spot, right?

  2. To follow up on odograph – which wholesale price were they quoting? I don’t see many jobbers wanting to buy winter RFG right now, because they’re probably sitting on enough to last them through ’til the changeover.

    To back that up – and I’m nowhere near a Bloomberg terminal or I’d post up a chart – I was scratching my head wondering why RBOB had dropped in price relative to ethanol last week (they were trading at parity, which seems odd given the 65% energy content of ethanol relative to gasoline, even when you take into consideration the huge RFS quota for 2008). I looked at a seasonality chart (basically the historical data running from Jan to Dec with a different line for each date), and low and behold the price of RBOB falls relative to ethanol every year around this time, which seems to be a reasonable suggestion that the value of the RBOB is less (as in, looking at it relative to ethanol sorta cancels out some of the other market noise).

    After all, isn’t almost all California gasoline CARB RFG? Certainly in LA it is.

  3. Your Wiki link says that in 2001, integrated companies and jobbers were both responsible for 44.3 percent of gasoline sales, but in 2004, the percentage handled by jobbers dropped to 37.1. If integrated companies took up the slack, they would control more than half of all retail sales.

  4. If integrated companies took up the slack…

    They didn’t. Integrated (oil and gas) companies have been divesting their retail stores to people who actually specialize in running retail stores. As another link I posted showed, the majors own less than 5% of the retail outlets. The slack has most likely been taken up by dedicated customers. Say EZ Mart has a deal with Shell to take X million gallons per year. They take that shipment via pipeline. But they are paying wholesale prices for it.

    Where the article is wrong is in assuming that the refiners are controlling high prices at the station. Late last spring, yes, the wholesale price was very high and that showed up at the pump.

  5. Actually, if “Distribution Costs, Marketing Costs and Profits” includes station profit that might be a huge difference between branded and unbranded, in absolute profits.

    The problem is that it still seems to bundle station profit with a lot of things outside the station.

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