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Gas: there’s a kink in the line

by Brian Clarey

By the time this editorial hits the streets, Hurricane Rita will have wreaked her damage to the parts of the Gulf Coast that were spared during Katrina’s go-round and visited further punishment on the Louisiana parishes devastated by that first storm.

But as of this writing, Sept. 23, the levees in New Orleans have again been breached and the streets of the 9th Ward prepare once more to be submerged.

Gas bottomed out today at $2.67 according to gasbuddy.com and just before lunch the prices, like the floodwaters, are already starting to rise.

So what’s up with that? It’s the same gas, drawn from the same underground reservoir, delivered by the same truck, only now it costs 20 cents more per gallon than it did five hours ago.

The question on everybody’s lips these days: How does that happen?

As one would imagine, the answer is a complex one, and also the subject of the study put out by the US Senate’s Permanent Subcommittee on Investigations in 2002 titled, ‘“Gas Prices: How are they really set?’”

The subcommittee is the same one that has recently been devoting its energies to studying credit-counseling fraud and tax shelter abuse and is chaired by Sen. Norm Coleman (R-Minn.).

The investigation revealed a number of problems with the economic model encompassing the purchase of crude oil up to the moment refined gasoline is sold from the pump, and also expressed concerns for the direction in which the industry seems to be headed.

The real problem here is a tight balance between supply and demand. We have seen a decrease in the amount of refineries making gasoline by about 52 percent since 1981, though the existing refineries’ average capacity has increased by almost 50 percent.

It doesn’t sound too bad, but the numbers mean that we are making less gasoline now than we were in 1981, nearly 15 years before the civilian Hummer became available on the public market.

Also, the supply chain itself has seen some cinching since 1998, when mergers and acquisitions streamlined much of the industry, enabling larger players to control the bulk of the flow of gasoline from refinery to the pump, creating a situation of oligarchy in 28 states and leaving the rest of them not much better off.

The subcommittee recognizes that when there is vertical integration between production and marketing, it results in ‘“a number of anti-competitive results, including higher wholesale and retail prices,’” one of which is a price point based on market conditions rather than the cost of manufacturing and selling the product. The price of gas is generally not set by the local station, but by forces high above it.

So gas prices go up fast. But why do they take so long to go back down?

The answer to that one is a little more simplistic: We’re all getting screwed.

Except, of course, for those of us who have financial ties to the petroleum industry.

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