Phishing Scams in Plain English [Common Craft] (Thanks to Angela!)

rickb928 writes:

The only novelty here is that the error got into production, and was not caught and corrected before it went that far.

Submitters send files to processors which are supposed to be formatted according to specifications.

Note I wrote 'supposed to be'.

Some submitters do, from time to time, change their code, and sometimes they get it wrong. For instance padding a field with spaces instead of zeros. Woopsie...!

Seems that's what happened here. Sounds like a hex or dec field got padded with hex 20, and boom.

This is annoying, especially when the processor gets to help correct the overwhelming number of errors, and then tries to explain that it wasn't their fault. Plenty of blame to go around with this one.

And then explains why they don't both validate/sanitize input, and test for at least some reasonable maximum value in the transaction amount. A max amount of $10,000,000 would have fixed this. That and an obvious lapse in testing. This is what keeps my bosses awake sometimes, fearing they will end up on the front page of the fishwrap looking stupid 'cause their overworked minions screwed something up, or didn't check, or didn't test very well. I love one of the guys we have testing. He's insufferable, and he catches genuine show-stoppers on a regular basis. They can't pay him what he's been worth, literally $millions, just in avoiding downtime and re-working code that went too far down the wrong path.

Believe me, this is in some ways preferable to getting files with one byte wrong that doesn't show up for a month, or sending the wrong data format (hex instead of packed binary or EBCDIC, for instance) and crashing the process completely. Please, I know data should never IPL a system. Tell it to the architects, please. As if they don't know now, after the one crash...

If you knew what I know, you'd chuckle and share this story with some of your buddies in development and certification.

And pray a little.

At least it didn't overbill the cardholders by $.08/transaction. That would suck. This is easy by comparison. Just fix the report data. Piece of cake. Evening's worth of coding and slam it out in off-peak time. Hahahahaha!

Nothing to see here, keep moving along please... [Slashdot] (Photo: Ballistik Coffee Boy) (Thanks to Toland!)

PREVIOUSLY:
The $23 Quadrillion Meal
The $23 Quadrillion Pack Of Cigarettes
Unruly Teen Charges $23 Quadrillion At Drugstore

Shadow banking [Marketplace]

The public-private partnership [Marketplace]

Collateral calls [Marketplace]

YMMV - Your Mileage May Vary. (Means the deal could just be specific to one store, a region, or the manager's whim)
BOGO - Buy one, get one free
S&H - Shipping and handling charge
FSH - Free shipping and handling
FS - Free shipping
B&M - Brick and Mortar (The physical store, usually used to mean the deal is in-store only)
AC - After Coupon (Price after coupon is applied)
AR - After Rebate (Price after rebate is received)
Price Mistake, Price Error - Posted price is a retailer error and it's likely orders will be canceled, but hey, dare to dream! (YMMV).
MIR - Mail-In Rebate
NIB - New In Box
BNIB - Brand New In Box
NWT - New With Tags
NOS - New Old Stock - stuff that was made a while back but has never been used.
OOS - Out of stock
OEM - "Original Equipment Manufacturer" - unit not originally intended for retail sale, may come without manuals, cables, instructions, or in a retail box.
B-Stock - Factory refurbished and tested

Let us know in the comments if we missed any. (Photo: funny strange or funny ha ha)

Go to the video on Vimeo to see the really nice HD version.

The Crisis Of Credit Visualized [jdjarvis via Boing Boing]

"This was my first credit card and I've had it since 1997," writes David. "I only keep it for the history and I only use it every now and then as a backup. Am I reading this right that they bumped me up to a 91.29% APR?"

Yep, David. Your APR on this card is 24.98%, but since you have a balance near zero on it, that $1.50 finance charge makes the effective APR look huge.

Mark to market [Marketplace]

A lot of people believe that if they fall behind on their debts, bankruptcy is the quickest way out. Much like the scammy get rich quick infomercials you see at 3 AM, bankruptcy sounds wonderful but is in reality an awful experience.

There are two types of personal bankruptcy - Chapter 7 and Chapter 13. Chapter 7 is total liquidation where all of your possessions are sold to help pay off the debt. Chapter 13 is known as the "wage earner's plan" and is used to help restructure the debts so that the debtor can work towards paying them off over the course of several years. Local laws will affect how each type of bankruptcy is administered and what is protected but the basics are the same everywhere.

So why is bankruptcy bad? It's bad because Chapter 7 and Chapter 13 bankruptcy is recorded on your credit report for ten years. For ten years you're going to have to deal with explaining why you went into bankruptcy and for ten years it'll be difficult for you to get a loan. It's not impossible, but it'll be difficult. The FHA will insure a mortgage two years after a Chapter 7 bankruptcy as long as you can show you've changed your ways. They will also insure a loan for someone one year after a Chapter 13 bankruptcy as long as they have stayed current on the plan payments.

What about a car loan? The rates are going to be very high. Bankrate offers up some tips on how to secure post-bankruptcy car financing and they quote double digit rates. Bankruptcy won't preclude you from loans, but it'll force a higher level of scrutiny.

What about the "other" areas your credit is used, like by landlords or employers? Bankruptcy Code § 525 protects someone who has declared bankruptcy from discrimination but it's often difficult to prove bankruptcy discrimination. If you were a landlord and had to choose between two renters, one who had declared bankruptcy or one who hadn't, which would you choose?

Bankruptcy won't solve all your problems and the people who go that route often have no other choice (which is why so many people report having higher credit scores after declaring bankruptcy). The best advice is to never let yourself get in this situation in the first place, but if you are, you should be aware of what's in store for you.

What do you think about bankruptcy? Think it's still too easy to start over? Think it's too hard?

Jim writes about personal finance at his personal finance blog, Bargaineering.

(Photo: andrewbain)

Here is a transcript.

Here's the money-graph:

"Who was responsible for deregulating the oil future market?" Kroft asked Michael Greenberger.

"You'd have to say Enron," he replied. "This was something they desperately wanted, and they got."

Asked why they wanted a deregulated market in oil futures, Greenberger said, "Because they wanted to establish their own little energy futures exchange through computerized trading. They knew that if they could get this trading engine established without the controls that had been placed on speculators, they would have the ability to drive the price of energy products in any way they wanted to take it."

"When Enron failed, we learned that Enron, and its conspirators who used their trading engine, were able to drive the price of electricity up, some say, by as much as 300 percent on the West Coast," he added.

"Is the same thing going on right now in the oil business?" Kroft asked.

"Every Enron trader, who knew how to do these manipulations, became the most valuable employee on Wall Street," Greenberger said.

But some of them may now be looking for work. The oil bubble began to deflate early last fall when Congress threatened new regulations and federal agencies announced they were beginning major investigations. It finally popped with the bankruptcy of Lehman Brothers and the near collapse of AIG, who were both heavily invested in the oil markets. With hedge funds and investment houses facing margin calls, the speculators headed for the exits.

"From July 15th until the end of November, roughly $70 billion came out of commodities futures from these index funds," Masters explained. "In fact, gasoline demand went down by roughly five percent over that same period of time. Yet the price of crude oil dropped more than $100 a barrel. It dropped 75 percent."

Asked how he explains that, Masters said, "By looking at investors, that's the only way you can explain it."

Did Speculation Fuel Oil Price Swings? [60 Minutes] (Thanks to Chris Schiffner!)

Hi Ben - I stumbled onto this article (Credit Card Numbers Decrypted) during the summer and it piqued my interest to learn more about BIN numbers. Eventually that interest led me to collaborate with a friend of mine to write a little mashup that I thought you might like - http://truecostofcredit.com.

Basically we mashed up the BIN number database (which is available for cheap from a variety of sources) and the Mastercard and Visa pricing rules (called interchange, which are published on their websites) to write a little app that answers the question "How much does it cost the store when I pay with a credit card".

In total, the credit card fees charged to businesses cost consumers about $50,000,000,000 / year (by way of higher prices), so it should be of interest to everyone who shops.

truecostofcredit.com [Official Site]

Quantitative easing [Marketplace]

Mary Schwager says that under these circumstances, you have better standing to ask the bank turn the HELOC back on again:

If your credit line is cut, you may be able to appeal that decision, especially if you've already sealed a deal to spend the money. Call your bank and ask what the process is.

You can find more plain-english explanations of the hows and whys of a HELOC getting cut off in Mary's latest column on Examiner.com.

Home equity lines suddenly reduced and cut! Why it could happen to you [Examiner.com]

Basically it's a fancy word for debt, and companies can use that money to go buy more stuff. But if the stuff you bought is a bunch of risky messed-up investments like crap mortgaged-backed securities then you've got a problem. Or, as Paddy Hirsch learns us in his latest whiteboard explainer, a big balloon straining to burst. Video inside...

Leveraging and deleveraging [Marketplace]

The Whiteboard: How credit cards become asset-backed bonds [Marketplace]

Anatomy of a Crisis [Washington Post]

The Three Markets: Contract, Spot and Futures

Both oil and gas are traded on three markets: the contract market, the spot market, and the futures market. Each is influenced by different factors and impacts the price of gas at different stages of production. Unlike the futures market, the contract and spot markets are not the kind of markets found on Wall Street; they are informal networks of businesspeople.

The Contract Market
Though it seems like oil companies spend most of their time ruining your day by raising the price of gas, their primary business is exploration. Once an oil company finds a field and coaxes it into producing crude, it takes that unrefined oil and sells to refiners. The vast majority of oil is sold by contracts. A veritable orgy of contracts signed between oil companies and dealers, oil companies and refiners, refiners and independent dealers predetermine the fate of most oil and gas.

Refiners plan their purchasing and refining activity to ensure that these contracts are fulfilled. In exchanged for this privileged standing, refiners charge contract customers a premium.

The Spot Market
Need some extra oil? Got a spare barrel you need to sell today? The spot market is for you. The spot market fills the gap left by the contracts market. When a refiner needs extra oil to meet its contracts, they find people with surplus oil on the spot market. Unlike the contract and futures markets, which trade pieces of paper, the spot market involves the trade of actual barrels.

The best deals are often found on the spot market. Since neither the buyer or seller is locked into a prearranged deal, the laws of supply, demand, and free market are mostly in effect.

The Futures Market
Crude oil is the bees knees of the American Mercantile Exchange. A futures contract might stand for 1,000 barrels of West Texas Intermediate to be delivered at Cushing, Oklahoma. The futures market represents that collective state of the oil market at any particular moment. When you hear reporters talk about the price of oil reaching $100 per barrel, they're talking about the futures market. Because fluctuations on the futures market are driven by information, its prices guide the contract and spot markets.

The people buying and selling futures rarely, if ever, collect on their contracts; a seven year period saw 5 billion barrels traded, of which only 31,000 were ever delivered.

Refineries

Refineries are the temples where crude oil gets Bar Mitzvah'd into gas. Shifts in the refining world over the past two decades have helped ratchet up the price of gas. In the early 80's, there were over 350 refineries, mostly owned by the oil companies. The oil companies didn't see refining as a place to generate profit, but as an integral part of a larger operation.

By 2002, there were only 153 refineries, and most of them were no longer controlled by the oil companies. Refineries are now held privately and independently, and as with any independent businesses, profit is key. It is in the refiner's interests to supply only as much gas as is absolutely needed to stay on the profitable side of the supply and demand curve.

Gas emerging from a refinery is sold at what is known as the 'rack price.' The rack price is the cost of gas to dealers, and it is generally influenced by the spot and futures market. The rack price is also where branded gas begins to exert a price premium.

Branded gas from Exxon-Mobile, BP-Amoco, etc, isn't different from the unbranded gas found at Joe Schmoe's Gas Shack. Still, there are several costs associated with branding gas. The brand name carries a premium, since people might associate it with quality, and not grossly overcompensated executives. Branded gas is also sold under contract, giving buyers long-term stability that can't be duplicated by unbranded gas. Oil companies also add value to branded gas by providing ancillary benefits that command a price premium, like branded advertising and branded credit cards.

Refiner pricing strategies are almost as complex as the mating rituals of the red-sided garter snake. Though refiners want to maximize their profit, they don't necessarily want to gain additional market share. Refining capacity can't simply be ramped up on demand. Acquiring and refining crude oil takes considerable time, leading refiners to take a slow and steady approach to business. First and foremost, refiners care about fulfilling their contractual obligations. Leftover gas can be sold for profit on the rack.

If a refiner's rack price is consistently too high, dealers will take their business elsewhere when their contracts expire. If the rack price is too low, buyers might swamp the refiner, leaving it unable to meet its contractual obligations.

To ensure pricing continuity, refiners used to call each other and share pricing information. Activist judges on the Supreme Court called this "collusion." The refiners, unfazed by the justices, came up with a crafty alternative: publicly posting their rack prices. Somehow, the Ninth Circuit Court found this to be illegal, too. Nobody knows how refiners discuss their pricing arrangements nowadays, but we wouldn't be surprised if it involved a members-only group on Facebook.

Gas Stations

Ah, gas stations. Nourishers of our cars, wellspring of our rage. Gas stations are not all alike. Some are owned outright by the oil companies, while others are leased by dealers who sell only one brand of gas.

There are supposedly nine benefits to being a branded lessee-dealer:

(1) a wider variety of grades of gasoline than unbranded, which leads to higher gross profit margins,
(2) access to oil company credit card at no fee,
(3) oil company third party fee discount for VISA and MasterCard,
(4) "subsidies" in the form of soft loans and investments,
(5) marketing assistance,
(6) rebates based on incremental volume,
(7) training and support on how to run a profitable gasoline station,
(8) technical support and station startup design, and
(9) security of supply.

There are also open dealers, who sign contracts with a particular brand, but can shift their allegiance whenever the contract expires. Open dealers interface with refiners through middlemen known as jobbers. A jobber will often supply several dealers, and depending on the size of the operation, will sign contracts, or buy unbranded gas either from the rack or the spot market.

Finally, there are the true independents. These folks shop around for the best unbranded gas price, sometimes aided by a jobber. They almost never sign long term contracts and almost always get their gas from the rack or the spot market.

At the turn of the 20th century, the U.S. had just under 175,000 gas stations. Of those, about 55,000 are run by independent operators. Of the remainder, half are run by open dealers, and the other half is split between company-owned and lessee-dealer stations.

Fixing The Price Of Gas

Oil companies set the price of gas at company-owned stations. What they say, goes. With lessee-dealers, the relationship is more complex.

Lessee-dealers are charged a 'Dealer Tank Wagon' (DTW) price by the oil companies. The DTW price is set either by the oil company's central or regional office, and is driven by both the spot and futures markets. Most importantly, oil companies determine the DTW price by looking at the prices of other stations in the market. This is why two stations with the same brand a block away from each other can have different prices.

Lessee-dealers can't negotiate a DTW price since they sign contracts with just one oil company that require them to purchase a minimum amount of gas. Oil companies allow dealers to sell gas at a slightly inflated margin to ensure a profit stream so the dealers can put food on their family's table. That margin can range from 3-10 cents per gallon.

Why don't dealers just raise the prices more, like 20 cents a gallon, so they can give their families even more food? Some do. If they're caught, you can bet anything the next DTW price will be higher, bringing their profit margins back to normal - only now, their gas is more expensive than their neighboring stations and they have a competitive disadvantage.

DTW pricing is the product of an exceedingly complex and secretive pricing scheme known as zone pricing. A zone can be as small as a single gas station, or as large as a city. The testimony of a Mobil representative in 1997 revealed that Mobil had 46 zones in Connecticut. Most dealers have no idea what zone they are in, even though the DTW price given to their neighboring stations can determine their standing in a local market.

Oil companies, like politicians reapportioning voting districts, rely heavily on technology to slice apart local markets. The DTW price in each zone will be different, taking account several factors including nearby competition, demographics, and the historical demand of the zone. Oil companies also seek to determine the price elasticity of each zone, or how much the zone will pay for gas before looking for alternative suppliers. For some zones, that breaking point is a penny, for others, it two or three cents, and some will stay with their station out of a sense of loyalty. These factors can cause the price of gas in neighboring zones to fluctuate by as much as a dime.

Oil companies adjust zone price by considering what their competitors are doing. The price of rival gas stations will be surveyed two or three times a week, or the data will be relayed to the oil companies by refiners.

Taxes

State and federal taxes account for about 18% of the price of gas. The cost is a constant and is factored into the baseline price of gas.

Eliminating those taxes would reduce the price of gas by a few cents, but would do nothing to otherwise address the underlying factors involved in pricing gas.

Ok... so why IS gas so expensive?

A butterfly flaps its wings in the Saudi desert, causing the State Department to release a warning of increased terrorist activity. The futures market flips out, sending the price of crude skyward.

The higher price on the futures market makes it more expensive for refiners to acquire crude to refine into gas. When the refiner's work is done, the emerging gas will be priced accordingly higher. This raises the rack price and the prices on the spot markets. Oil companies and jobbers with long-term contracts might be insulated from the higher price, depending on their contracts.

Refining oil into gas isn't instantaneous, and there can be a lag before the higher price of the oil is reflected in higher gas prices paid by jobbers and oil companies. That, of course, didn't stop them from raising prices the moment the futures market jumped. So now that the oil that was purchased for refining at a higher cost is ready to hit the market as gas, the oil companies will raise prices again.

This double-dipped price is passed onto dealers as the DTW price, which is then inflated yet again so the dealers can turn a profit.

You paid more for gas thanks to a butterfly.

"It's just a !@$% butterfly!," you say. Sure, but it scared the hell out of the markets. Since the oil companies all move in lockstep, that butterfly can cause the price of gas to rise for several days as one oil company sees another raising prices and adjusts accordingly.

Eventually the markets will calm and the price will begin to fall. This allows the introduction of a friend much more insidious than the butterfly: price gouging.

Despite popular misconceptions, price gouging almost never occurs as prices rise. Instead, price gouging occurs when dealers keep prices artificially high in order to gain a little extra profit or recoup costs, even though the DTW price has declined.

Sticking with our butterfly friend, let's say she caused the DTW price of gas to spike for four days. It may be ten days before dealers lower their prices. That's price gouging.

Most people never notice true price gouging. They will complain that the price went too high, but that's the fault of the oil companies, not the dealers. Prices that stay high for too long go unnoticed. Just because the price of gas stays high does not mean that a dealer is price gouging. The price may actually be higher. That's why it's almost impossible to prove, let alone prosecute, price gouging.

Conclusion
Most of the above draws on the excellent work of the Senate Permanent Subcommittee on Investigations, which produced a 324 page report that makes for a fascinating read. Direct links to the report sections are below:
Executive Summary
Introduction
The Production and Marketing of Gasoline
The Effects Of Market Structure And Concentration On Gasoline Prices
How Gasoline Prices Are Set

Unless you're a Saudi Arabian butterfly, you can't hope to control the oil market, but you can control your consumption. Reduce your gas costs by carpooling, biking, walking, using gas price finder sites to decrease the information asymmetry, and/or switching to a car with a better MPG.

RELATED:
What Goes Into The Price Of Gas?
Get 30 More Miles Per Tank: Turn Off Engine If Idling More Than 10 Seconds
Potentially Insane Ways To Increase Your Fuel Efficiency

(Photo: Getty)

Editor's Note: This post was originally published May 2007. I decided to republish it now because it's one of my favorite posts Carey ever did, and it's incredibly relevant in the current economic situation.

Crisis explainer: Uncorking CDOs from Marketplace on Vimeo.Basically, the CDO manager has a champagne bottle filled with mortgages. Every month when the debtors pay their mortgages, it fills the bottle with payments. The cork pops off and he pours the bubbly over a tray of glasses, each one representing a tranche of increasing risk.

The glasses at the top, rated AAA, get paid first and the least amount, and the bubbly flows down to AA, BBB, BB and equity, the tray at the bottom.

The party gets bad when people stop paying their mortgages. Now the bubbly only reaches the first levels, and the BB and the equity don't get paid at all. To make it worse, we have a SECOND CDO manager.

His bottle, instead of being filled with the mortgages, is filled with the BB-rated securities. When a few people stop paying on the first bottle, that means his bottle has no juice at all. He has a whole champagne glass tower with glasses rated AAA through BB like the first one, but it's not getting filled up at all. Then the champagne towers fall over and crash and Wall Street evaporates and there's runs on the bank some wisenheimer paints the Wall Street bull's balls blue. That's CDOs for you.

If you enjoyed that one, he also made another video explaining Credit Default Swaps, which are what brought AIG down.

Crisis explainer: Uncorking CDOs [Marketplace]

Glass-Steagall was passed under the Roosevelt administration in 1933 in direct response to the Wall Street shenanigans that ushered in the Great Depression where banks shoved their own depositors into buying the stocks the banks were dealing. The basic idea was to keep banks from speculating with the savings that American citizens were entrusting within their vaults.

Its repeal, under the Gramm-Leach-Bliley Act, drafted and passed by a Republican congress, and signed by Billiam Jefferson Clinton, allowed commercial banks to merge with investment banks. For instance, Citigroup merged with Traveler's Insurance (although this merger was announced in 1998, before the act was passed, at the time Citigroup CEO Sanford I. Weill said that he spoke with the Feds and, "that over that time the legislation will change...we have had enough discussions to believe this will not be a problem.").

Now, on the one side they could sell mortgages to homeowners, and then invent fancy investment structures which they sold on Wall Street. Because they were "covered" on both ends, banks felt free to sell increasingly dicey mortgages, just so long as another sucker was picking up the garbage. This sucker was picking it up because he had a plan to repackage it and sell it to another sucker, and so on. Eventually we end up with no-doc stated income interest-only option-ARM no money down mortgages being repackaged as "sound investments" being sold as "stable assets" for city pension plans to park their money in. (See "Subprime Meltdown As Told By Stick Figures").

We can only imagine the level of machination exerted over those 30 years, but we do know this. Robert Rubin was Secretary of Treasury, which had oversight over Glass-Steagall regulation. Days before he resigned, Glass-Steagall was repealed. Just over a year later, he became chairman of the Citi executive committee, with an annual compensation of $40 million, a position he still holds, despite Citigroup's $24 billion in subprime-related losses.

(Photo: Joy Of The Mundane)

The Skinny on the Stimulus Plan [WSJ]
PREVIOUSLY: $600 Rebates Are A Tax Credit Advance
(Photo: Getty)

MAPs skirt closely to price-fixing, which was, up until recently, illegal.

Minimum Advertised Price [About]
(Photo: Ben Popken)

1. Store managers purposely keep employees unaware receipt check's voluntary nature, ensuring that a manager has to be called each and every time. The last thing they want is somebody with 16 CDs in their pants yelling about his civil rights and cowing a $7.50/hr teenager.

2. Major retail store locations get an estimated yearly "shrinkage" budget, is the dollar value of the amount of merchandise they expect to lose to theft. In the our former BBY employee's store's case,the difference between the actual and estimated shrinkage is then distributed evenly to each and every worker in that store.

PREVIOUSLY:
Adventures In Receipt Check Refusals Continue
Circuit City Customer Arrested After Refusing To Show Receipt
TigerDirect Apologizes For Unlawfully Detaining Customer For Refusing To Show Receipt
TigerDirect Unlawfully Restrains And Verbally Abuses Customer For Not Submitting To Receipt-Showing Demands

Items for the bathroom like Apskar (a wash basin), Toftbo (a bathroom mat), and Sanni (a bath sheet) are named after Scandanavian lakes, rivers and bays—that seems appropriate.

Stuff for kids is named after mammals, birds, and adjectives. So if you buy your children a Smyg, they're getting a lamp named for a wren. And a child's desk is Fartful, which of course means "speedy" in Swedish.

For the full run-down, Wikipedia has all the answers.

Unraveling the IKEA product naming mystery [a hundred moneys] (Thanks to c-side!)

A public utility offers two main services to its customers:

1) Electrical Distribution
2) The Sale of the Electricity

When larger utility services company, like Con Ed, are deregulated, then the electricity can now be sold independently to the customer by an ESCo. As part of the service, the ESCo also provides billing and customer support to the customer.

ESCos buy electricity on the open market and sell it to utility companies. They will buy electricity from a plant in one area, purchase transport rights, then move it across the grid, a process called wheeling.

The ESCo charges you for the sale of power, and the utility charges you for the distribution over the lines. Switching to an ESCo should essentially be a win/win situation: With energy and distribution bundled together as one payment prior to deregulation, then the entire cost to the consumer was taxed. Separated, distribution is tax-free and only the electricity usage is taxed. Instant savings.

Let's look at a pretty picture...

Customers shopping for an ESCo need to read their contracts carefully. Sometimes people will get drawn in by a low rate, only to find out later that the rate is variable.

There is a huge push to get people to sign over to ESCo's in NY right now. Con Edison even has its own ESCo set up: Con Ed Solutions. — THOMAS MOORE

FURTHER READING:
Shopping For Electricity [AskPSC]
YOUR HOME; The Shock Of Electric Deregulation [NYT]
RELATED:
Consumerist Undercover At IDT Energy: The Job Interview
Consumerist Undercover At IDT Energy: Day One

A group of 4th graders in Arizona learned this as part of National Weights and Measures Week (save the date: March 5-9), and now you do too. — BEN POPKEN

ADWM Alert June 2007 (PDF) [Arizona Department of Weights & Measures]
Tare Weight [Wikipedia]

As gas costs rise to $4 a gallon and oil companies earn around $100 billion each year, it's a good time to question what really goes into the price of gas.

The numbers on the gas station sign hide a complex set of transactions. Before gas can power your car, it must be discovered as crude oil, traverse three markets, and be refined from crude into gas.

Inside, we'll explain the three markets, walk you through the role of refineries, and show how oil companies use creative tactics to manipulate gas prices...

The Three Markets: Contract, Spot and Futures

Both oil and gas are traded on three markets: the contract market, the spot market, and the futures market. Each is influenced by different factors and impacts the price of gas at different stages of production. Unlike the futures market, the contract and spot markets are not the kind of markets found on Wall Street; they are informal networks of businesspeople.

The Contract Market
Though it seems like oil companies spend most of their time ruining your day by raising the price of gas, their primary business is exploration. Once an oil company finds a field and coaxes it into producing crude, it takes that unrefined oil and sells to refiners. The vast majority of oil is sold by contracts. A veritable orgy of contracts signed between oil companies and dealers, oil companies and refiners, refiners and independent dealers predetermine the fate of most oil and gas.

Refiners plan their purchasing and refining activity to ensure that these contracts are fulfilled. In exchanged for this privileged standing, refiners charge contract customers a premium.

The Spot Market
Need some extra oil? Got a spare barrel you need to sell today? The spot market is for you. The spot market fills the gap left by the contracts market. When a refiner needs extra oil to meet its contracts, they find people with surplus oil on the spot market. Unlike the contract and futures markets, which trade pieces of paper, the spot market involves the trade of actual barrels.

The best deals are often found on the spot market. Since neither the buyer or seller is locked into a prearranged deal, the laws of supply, demand, and free market are mostly in effect.

The Futures Market
Crude oil is the bees knees of the American Mercantile Exchange. A futures contract might stand for 1,000 barrels of West Texas Intermediate to be delivered at Cushing, Oklahoma. The futures market represents that collective state of the oil market at any particular moment. When you hear reporters talk about the price of oil reaching $100 per barrel, they're talking about the futures market. Because fluctuations on the futures market are driven by information, its prices guide the contract and spot markets.

The people buying and selling futures rarely, if ever, collect on their contracts; a seven year period saw 5 billion barrels traded, of which only 31,000 were ever delivered.

Refineries

Refineries are the temples where crude oil gets Bar Mitzvah'd into gas. Shifts in the refining world over the past two decades have helped ratchet up the price of gas. In the early 80's, there were over 350 refineries, mostly owned by the oil companies. The oil companies didn't see refining as a place to generate profit, but as an integral part of a larger operation.

By 2002, there were only 153 refineries, and most of them were no longer controlled by the oil companies. Refineries are now held privately and independently, and as with any independent businesses, profit is key. It is in the refiner's interests to supply only as much gas as is absolutely needed to stay on the profitable side of the supply and demand curve.

Gas emerging from a refinery is sold at what is known as the 'rack price.' The rack price is the cost of gas to dealers, and it is generally influenced by the spot and futures market. The rack price is also where branded gas begins to exert a price premium.

Branded gas from Exxon-Mobile, BP-Amoco, etc, isn't different from the unbranded gas found at Joe Schmoe's Gas Shack. Still, there are several costs associated with branding gas. The brand name carries a premium, since people might associate it with quality, and not grossly overcompensated executives. Branded gas is also sold under contract, giving buyers long-term stability that can't be duplicated by unbranded gas. Oil companies also add value to branded gas by providing ancillary benefits that command a price premium, like branded advertising and branded credit cards.

Refiner pricing strategies are almost as complex as the mating rituals of the red-sided garter snake. Though refiners want to maximize their profit, they don't necessarily want to gain additional market share. Refining capacity can't simply be ramped up on demand. Acquiring and refining crude oil takes considerable time, leading refiners to take a slow and steady approach to business. First and foremost, refiners care about fulfilling their contractual obligations. Leftover gas can be sold for profit on the rack.

If a refiner's rack price is consistently too high, dealers will take their business elsewhere when their contracts expire. If the rack price is too low, buyers might swamp the refiner, leaving it unable to meet its contractual obligations.

To ensure pricing continuity, refiners used to call each other and share pricing information. Activist judges on the Supreme Court called this "collusion." The refiners, unfazed by the justices, came up with a crafty alternative: publicly posting their rack prices. Somehow, the Ninth Circuit Court found this to be illegal, too. Nobody knows how refiners discuss their pricing arrangements nowadays, but we wouldn't be surprised if it involved a members-only group on Facebook.

Gas Stations

Ah, gas stations. Nourishers of our cars, wellspring of our rage. Gas stations are not all alike. Some are owned outright by the oil companies, while others are leased by dealers who sell only one brand of gas.

There are supposedly nine benefits to being a branded lessee-dealer:

(1) a wider variety of grades of gasoline than unbranded, which leads to higher gross profit margins,
(2) access to oil company credit card at no fee,
(3) oil company third party fee discount for VISA and MasterCard,
(4) "subsidies" in the form of soft loans and investments,
(5) marketing assistance,
(6) rebates based on incremental volume,
(7) training and support on how to run a profitable gasoline station,
(8) technical support and station startup design, and
(9) security of supply.

Finally, there are the true independents. These folks shop around for the best unbranded gas price, sometimes aided by a jobber. They almost never sign long term contracts and almost always get their gas from the rack or the spot market.

At the turn of the 20th century, the U.S. had just under 175,000 gas stations. Of those, about 55,000 are run by independent operators. Of the remainder, half are run by open dealers, and the other half is split between company-owned and lessee-dealer stations.

Fixing The Price Of Gas

Oil companies set the price of gas at company-owned stations. What they say, goes. With lessee-dealers, the relationship is more complex.

Lessee-dealers are charged a 'Dealer Tank Wagon' (DTW) price by the oil companies. The DTW price is set either by the oil company's central or regional office, and is driven by both the spot and futures markets. Most importantly, oil companies determine the DTW price by looking at the prices of other stations in the market. This is why two stations with the same brand a block away from each other can have different prices.

Lessee-dealers can't negotiate a DTW price since they sign contracts with just one oil company that require them to purchase a minimum amount of gas. Oil companies allow dealers to sell gas at a slightly inflated margin to ensure a profit stream so the dealers can put food on their family's table. That margin can range from 3-10 cents per gallon.

Why don't dealers just raise the prices more, like 20 cents a gallon, so they can give their families even more food? Some do. If they're caught, you can bet anything the next DTW price will be higher, bringing their profit margins back to normal - only now, their gas is more expensive than their neighboring stations and they have a competitive disadvantage.

DTW pricing is the product of an exceedingly complex and secretive pricing scheme known as zone pricing. A zone can be as small as a single gas station, or as large as a city. The testimony of a Mobil representative in 1997 revealed that Mobil had 46 zones in Connecticut. Most dealers have no idea what zone they are in, even though the DTW price given to their neighboring stations can determine their standing in a local market.

Oil companies, like politicians reapportioning voting districts, rely heavily on technology to slice apart local markets. The DTW price in each zone will be different, taking account several factors including nearby competition, demographics, and the historical demand of the zone. Oil companies also seek to determine the price elasticity of each zone, or how much the zone will pay for gas before looking for alternative suppliers. For some zones, that breaking point is a penny, for others, it two or three cents, and some will stay with their station out of a sense of loyalty. These factors can cause the price of gas in neighboring zones to fluctuate by as much as a dime.

Oil companies adjust zone price by considering what their competitors are doing. The price of rival gas stations will be surveyed two or three times a week, or the data will be relayed to the oil companies by refiners.

Taxes

State and federal taxes account for about 18% of the price of gas. The cost is a constant and is factored into the baseline price of gas.

Eliminating those taxes would reduce the price of gas by a few cents, but would do nothing to otherwise address the underlying factors involved in pricing gas.

Ok... so why IS gas so expensive?

A butterfly flaps its wings in the Saudi desert, causing the State Department to release a warning of increased terrorist activity. The futures market flips out, sending the price of crude skyward.

The higher price on the futures market makes it more expensive for refiners to acquire crude to refine into gas. When the refiner's work is done, the emerging gas will be priced accordingly higher. This raises the rack price and the prices on the spot markets. Oil companies and jobbers with long-term contracts might be insulated from the higher price, depending on their contracts.

Refining oil into gas isn't instantaneous, and there can be a lag before the higher price of the oil is reflected in higher gas prices paid by jobbers and oil companies. That, of course, didn't stop them from raising prices the moment the futures market jumped. So now that the oil that was purchased for refining at a higher cost is ready to hit the market as gas, the oil companies will raise prices again.

This double-dipped price is passed onto dealers as the DTW price, which is then inflated yet again so the dealers can turn a profit.

You paid more for gas thanks to a butterfly.

"It's just a !@$% butterfly!," you say. Sure, but it scared the hell out of the markets. Since the oil companies all move in lockstep, that butterfly can cause the price of gas to rise for several days as one oil company sees another raising prices and adjusts accordingly.

Eventually the markets will calm and the price will begin to fall. This allows the introduction of a friend much more insidious than the butterfly: price gouging.

Despite popular misconceptions, price gouging almost never occurs as prices rise. Instead, price gouging occurs when dealers keep prices artificially high in order to gain a little extra profit or recoup costs, even though the DTW price has declined.

Sticking with our butterfly friend, let's say she caused the DTW price of gas to spike for four days. It may be ten days before dealers lower their prices. That's price gouging.

Most people never notice true price gouging. They will complain that the price went too high, but that's the fault of the oil companies, not the dealers. Prices that stay high for too long go unnoticed. Just because the price of gas stays high does not mean that a dealer is price gouging. The price may actually be higher. That's why it's almost impossible to prove, let alone prosecute, price gouging.

Conclusion
Most of the above draws on the excellent work of the Senate Permanent Subcommittee on Investigations, which produced a 324 page report that makes for a fascinating read. Direct links to the report sections are below:
Executive Summary
Introduction
The Production and Marketing of Gasoline
The Effects Of Market Structure And Concentration On Gasoline Prices
How Gasoline Prices Are Set

Unless you're a Saudi Arabian butterfly, you can't hope to control the oil market, but you can control your consumption. Reduce your gas costs by carpooling, biking, walking, using gas price finder sites to decrease the information asymmetry, and/or switching to a car with a better MPG. - CAREY GREENBERG-BERGER

RELATED:
Get 30 More Miles Per Tank: Turn Off Engine If Idling More Than 10 Seconds
Potentially Insane Ways To Increase Your Fuel Efficiency

(Photo: Getty)

A publicist releases information to journalists with the stipulation that it can't be reported until a certain time and date. This allows the company to coordinate news coverage with their public announcement, new ads, and other marketing initiatives. For their part, the embargo allows journalists the time needed to publish a "breaking" story that's well-developed, fact-checked, has multiple quotes, and comes in on deadline.

Sometimes the gentleman's agreement is arranged in advance between the publicist and the journalist, or a working arrangement with the news organization at large. Sometimes, publicists simply send out releases already declared embargoed (such has been the case with every embargoed release we've ever received).

If an embargo is broken, the company might blacklist the reporter or news organization from future juicy tidbits, and the reporter's ethics will be called into question.

Hardly headline news, but we thought you would be interested in hearing about this way in which corporations try to control the journalism process. — BEN POPKEN

(Photo: Getty)

According to its proponents, which include School House Rock, this reduces your risk because you buy less of a stock when it's high, and more when it's low.

DCA was debunked, using scary equations, in,"A Note On The Subotimality of Dollar-Cost Averaging As An Investment Policy" published in the Journal of Financial and Quantitative Analysis in 1979 *. Comparing DCA to lump-sum, George Constantindies wrote, "Both investors face the same prospects irrespective of the composition of their endowment, and any claims of gambles on temporarily overpriced or underpriced prices are simply fallacious."

Statistically, DCA underperforms lump-sum investing (aka, putting a buncha money in at once), as this calculator shows. An exercise by MSN Money found that DCA even underperforms putting in money at random intervals. Their rate of return was 9.8% for DCA, 10.5% by happenstance, and 11.7% with a lump-sum.

However, there is a method that fares even worse than DCA: not investing at all. — BEN POPKEN

* From A Note On The Subotimality of Dollar-Cost Averaging As An Investment Policy:

Where, then, does the intuitive rational of DCA fail? Its rationale is that the investor replaces one major gamble on a temporary shift of prices by a number of smaller gambles and thus diversifies risk. The fault of this argument is misrepresentation of the state of the world, before a decision is made. DCA implies than an investor with all his endowment in asset A is in some way different from an investor with all his endowment in asset B, but otherwise identical. DCA ignores the simple fact that the latter investor may costlessly convert his endowment from asset A to asset B before he considers the optimal investment decision. Both investors face the same prospects irrespective of the composition of their endowment, and any claims of gambles on temporarily overpriced or underpriced prices are simply fallacious. We do not claim that the investor should not incorporate in his optimal decision his beliefs on whether assets are overpriced or underpriced. What we do claim is that these beliefs lead to the same optimal portfolio irrespective of the composition of initial wealth.

Basically, you do a chargeback when you feel like you're not getting what you paid for, in terms of the quality or type of good or service.

To start a chargeback, contact your credit card company and ask. A dispute process begins and the merchant will have to provide proof they rendered service properly. If the merchant can't provide sufficient evidence, the credit card company debits the transaction amount from the merchant's account and credits it to your account.

Additionally, the credit card company charges the merchant a chargeback fee.

We urge consumers to only use chargebacks as a last resort and never before making several attempts to resolve an issue directly with a merchant. The last step before doing a chargeback is to threaten to use one. Sometimes that's enough to change a vendor's mind and let them know you're serious.

Have you ever used a chargeback? How did it work out? — BEN POPKEN

The worm operated undetected for at least 18 months, capturing credit card numbers, then changing timelogs and moving data around to erase its tracks.

Initial speculation suggested that the thieves had access to the retailer's encryption key. Now it may be that the program captured data before it was encrypted.

If the latter, the ramifications are immense, as it means every single retailer's credit card processing system is at risk. — BEN POPKEN

TJX Intruder Had Retailer's Encryption Key [eWeek] (Thanks to Brandon!)