Summer gas pains: Who to blame?

Marketplace Staff May 18, 2007

Summer gas pains: Who to blame?

Marketplace Staff May 18, 2007

TESS VIGELAND: I paid $3.53 a gallon for gas this week.
But that was a pittance compared to what I would have paid if I went to Bob Oyster’s gas station in San Francisco.
Try $4.33 a gallon!

The Shell station owner told the San Francisco Chronicle he was out to make a point, not a profit. He says Shell overcharged him for gas, and hiked his rent.
Clearly, there’s more to the price at the pump than the cost of crude.

For a breakdown, we’ve turned to Severin Borenstein of the University of California’s Energy Institute. So: Does Mr. Oyster have a legitimate beef here?

SEVERIN BORENSTEIN: Occasionally, the service-station operators try to make this into a Big Oil versus the small businessman deal. And in some sense, it’s right in that Big Oil is always trying to squeeze the service station operators. But they then try to extend it to say “This is why gas prices are high.” And it’s just not.

VIGELAND: It certainly seems like whenever we hear about the price of oil going up – you know, you hear a spike of a dollar, or even $2 – and automatically, the price of gasoline goes up at the corner station. Despite the fact that I believe oil prices are determined three months in advance of when they actually hit the market. Is that correct?

BORENSTEIN: Well, oil prices that get reported are generally prices for delivery a couple months from now. But oil is a storable good. So when the price goes up for delivery a couple months from now, it’s generally pulling up the price for delivery even tomorrow.

VIGELAND: Well, this entire discussion that we’ve been having is predicated on the notion that gas prices follow oil prices. But really, recently, oil prices have not been rising. They’ve stayed fairly flat. And yet, we’ve seen this huge jump in the price of gasoline at the pump. What’s going on?

BORENSTEIN: Oil prices are the first component. The next component is the refinery margins, and that’s what’s gone through the roof in the last few months. The refineries are still able to buy oil at around $60 a barrel, but now they’re able to sell gasoline for 50 or 75 or even as much as 90 cents more than they were last fall. So what we’ve seen is the profits of those refineries has gone through the roof. We haven’t built any new refineries in the United States since the 1970s. And as a result, if you do own a refinery, you’re able to make a lot of money running it.

VIGELAND: How likely is it that we’re going to see any relief any time soon? I mean, I know that the travel season always brings higher gas prices through the summer. But are we ever going to get back to the point where we’re seeing $2.50, $2 a gallon?

BORENSTEIN: We have always seen somewhat higher prices during the driving seasons, but up until a few years ago, the differential was just a few cents a gallon. But as we go through the summer, I would be surprised if we see much relief in the price of gasoline.

VIGELAND: And there’s certainly those who argue that we shouldn’t see any relief in the price of gasoline, and that the higher it goes, maybe the more our collective consciousness will force us to buy smaller cars and not drive as much.

BORENSTEIN: But there’s an important difference between high prices that are going to refinery profits and high prices that are going to higher government taxes. If we did this through raising gas taxes, we could use the revenue to lower other taxes – such as our payroll and income taxes.

VIGELAND: All right. Severin Borenstein, thanks so much for helping us figure out this riddle of gas prices.

BORENSTEIN: Glad to be with you.

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