The spike in prices is being blamed on a decrease in gas production and a weak dollar — not on an increase in demand.

"Until consumers are confident in their jobs and future income, they're going to be very hesitant in spending,"[a senior economist with Moody's Economy.com] told the AP. "And higher gas prices are just another excuse to keep money in the pocket."

Retail gas prices nearing summer highs [AP]
(Photo:ibelli)

Quan writes:

I just wanted to let you know about a recent problem (10/15) with the Shell branded Citi Mastercard. Apparently, on October 15th, Citi decided to close thousands of accounts without notice. When I personally called to see why my card was closed, they CSR's response was " Something on your Equifax report prompted us to close your account. A letter was supposed to have sent out to you, but there was a delay. You will receive your letter shortly, which will provide further details." She would/could not tell me what was wrong exactly. Curious, I decided to check my credit report and NOT to my surprise, absolutely nothing negative was recently added! I decided to do a google search to see if others have experienced similar issues and I found out I was not the only one.

So, they are closing accounts for no apparent reason and telling their (former) customers that there is something wrong with their credit report when there really isn't. The best part is that Citi is not going to be paying the rebate we have earned for purchases in the previous month because the account was closed. For some people this is quite significant because they use this card as their primary card. I have not confirmed, but apparently, the 15th was chosen as the date to close accounts because that is the day before the billing cycle ends, which allows them to forgo giving us our rebates.

Some background info on the card: This is a shell branded Citi Mastercard that gives 5% rebates on all Shell gas purchases. I use this card exclusively to purchase gas and have always received a monthly rebate equal to 5% of all my shell gas purchases and 1% for all other purchases. The majority of the time I pay my balance in full each month, which allows me to maximize my savings (obviously).

Did Citi cut off your gas-station branded credit this week? Does this affect your personal finance situation? Sound off in the comments.

Citi starts closing Mastercards without warning [MSNBC]
(Photo: Kenny Hindgren)

One way is to avoid gas stations that overcharge. It may be worth the savings to go out of your way in order to avoid stations that are located off the freeway and traditionally charge more. The post says:

In most regions, you will find the cheapest gas prices in the same areas. In major metro areas, this seems to be outlying suburbs. It is best to avoid affluent areas when looking for a cheap fill. People in these areas are less price sensitive, and the gas stations realize this fact. Not only that, the gas stations are located on more valuable land, and land taxes will be higher. They pass on these higher costs to customers. Gas stations near major freeway exists can be more expensive that stations further away. It can pay to drive a few blocks from the freeway to find a deal.

The article links to a list of 10 ways you can reduce fuel costs by tweaking the way you drive, such as keeping windows closed, properly inflating your tires and avoiding weighing down your ride with heavy, mileage-killing cargo.

Fuel and Money Saving Tips [Gas Buddy]
(Photo: blue_j)

SpotMotorcycles took a look at the myth of bike commuting utopia. Their verdict: It's worthwhile only for some people, and most of those people already own motorcycles.

I made my own estimate with their calculator, and it showed that I would actually lose $106 per year by commuting on a motorcycle, and that doesn't even take into account money spent on gear, licensing, or safety courses. Save money on commuting by purchasing a more fuel-efficient car? Maybe. But few Americans who live in areas without good public transit are able to completely get rid of their cars. If you want to feel the wind in your helmet, consider investing in a bicycle for short trips instead.

Save Money Commuting by Motorcycle? Not So Fast! [Spot Motorcycles]

(Photo: stirwise)

For those of you who have never visited or lived along the mid-Atlantic or eastern Rust Belt, Wawa and Sheetz are two very similar gas station/convenience stores that are just light years ahead of 7-Eleven, Cumberland Farms, etc. in terms of food and drink selection, clean bathrooms, and the amount of Prince and Genesis that is regularly played over their speakers.

We lived across the street from a Wawa our last year of law school and are still paying off the balance on our Wawa Visa. Our last meal will be a pizza cheese steak and a half gallon of diet lemonade iced tea.

Wawa vs. Sheetz [WaPo]
(Photos: mortonfox, hswilkinson)

"10 things gas stations won't tell you" [MSN Money] (Thanks to Chester!) (Photo: °Florian)

We've already gone over the details, and warned you about how to spot a scammer trying to profit off the program. However, if you really are in the market for a new car, how can you find the best, fuel-savingest one out there? Consumer Reports has some ideas, and they've even done the math to show how much money you can save in addition to the rebate, from just buying less gas.

Car Allowance Rebate System [NHTSA]
Cash for clunkers: Recommended cars that qualify for a voucher
Cash for clunkers: The best gas guzzlers to junk
Cash for clunkers bill cuts fuel consumption–running the numbers

(Photo: Laura Northrup)

Pete Horrigan, president of the Mid-Atlantic Petroleum Distributors Association, said recent heavy rains could be to blame, as the rain can collect on the seals of storage tanks or leak into the service station supply.

"When the ground gets saturated, it's possible that when the driver removes the cap to hook his delivery hose to underground storage tanks, it's possible that water could get into the tank."

Oceanic station owner Adrian Hughes said he's a victim, too, and is working around the clock to fix the cars.

How much water needs to leak into an underground tank before it damages cars, I wonder?

2nd Gas Station Hit With Bad Supply [WBAL]

(Photo: vc_vigilant)

Worst of all, ballooning oil/gas prices will only drag the economy down.

Businesses that expect to thrive under such conditions will have to adapt surging gas costs into all facets of their business philosophy, the Chicago Business Examiner reports:

As consumers wait and watch and continue to spend slowly, businesses should develop strategies to help consumers deal with energy challenges not only for today but tomorrow as well. If oil reaches $250 per barrel consumer behavior will change drastically. Even If oil reaches $150 per barrel consumer behavior will change drastically. Any business that develops ways for consumer's to lower energy consumption and expenses will shine. Whether developing an improved communication systems, more fuel-efficient cars, or methods to reduce travel, businesses need to think through energy pricing while developing and adapting their business plans and strategies.

Gasoline prices rising quickly is a two-sided problem, as gasoline prices rise people have less to spend on other consumer products which means businesses lose money. Businesses have less money because people are not buying their goods or services. We are undoubtedly shackled to oil and gasoline pricing and the more they increase the longer an economic recovery will take. It is critical that businesses adapt to gasoline price increases by developing corporate energy strategies that will lower costs wherever possible. Now is the time for business to lead and adapt not wait and react.

As a silver lining, expect unicycle and rickshaw stock to soar.

Gasoline price increases threaten economic recovery and businesses must adapt [Examiner]

In New York, it's illegal for retailers to levy credit card surcharges on customers. Making stores charging the same price sounds pro-consumer, but it actually leads to higher prices. Sometimes it really is best to let the market to find its own solution. Some stores already have. To get around legislation and merchant agreements barring charge credit card customers more, they instead give discounts to people paying cash.

RELATED:

A Home Depot spokesperson told the Associated Press that there have been no customer complaints, but most of their customers probably don't know about it in the first place. Home Depot's customers may be happy, but there have clearly been some complaints in California, because the state has launched an investigation into "short filling" to see why retailers have effectively raised prices on the gas without clearly notifying customers.

"Propane suppliers quietly reduce size of refills" [Associated Press] (Thanks to Larry and Cathy!)
"Propane 'Short-Filling' Launches State Investigation" [KTXL Fox40]
(Photo: sidewalk flying)

Costco offer would fix hot fuel [Kansas City Star] (Photo: whatatravisty)

[Energy Information Administration]

[Energy Information Administration]

Subtle Butt is made from activated carbon and apparently makes your flatulence smell like a baby unicorn's breath. We think such a device would be useful when combined with all-you-can-eat ballpark chili dogs, nachos, and boardwalk fries. This is excellent synergy!

Subtle Butt is manufactured by Garment Guard, which also makes armpit sweat protectors and some kind of skid mark eraser.

A Subtle Way to Curb Ballpark Emissions [Ben's Biz Blog]

[Energy Information Administration]

[Energy Information Administration]

[Energy Information Administration]

"U.S. public transit 2008 ridership highest in 52 years" [Reuters]
(Photo: Kriston Lewis)

He only learned of the astounding figure when he received an email later that afternoon informing him that his debit card, which started out with $90 on it, was maxed out.

Initially, Mr. Zamora thought it must've been a joke. But after contacting PayPal customer service he was surprised to see that the company treated it as anything but a laughing matter.

"Somebody from a foreign country who spoke in broken English argued with me for 10 to 15 minutes," Zamora said. " ‘Did you get the gas?' he asked. Like I had to prove that I didn't pump $81,400,836,908 in gas!"

He would have needed more than 3 billion fill-ups of the amount he actually pumped into his tank in order to reach that outrageous sum.

Eventually, Zamora said, he was finally able to convince the representative that he didn't deserve to be in the same position as General Motors, who has lost roughly 80 billion dollars since 2005.

When Zamora returned to the Conoco gas station, he said, the attendant would not believe him until he showed her the printout of the PayPal receipt.

What moral is Juan taking away from the story? "Pay cash."

Driver Fills up Gas Tank, Receives Bill For $81 Billion [Consumer Energy Report via Jalopnik]
(Photo: NASA)

The Corporate Average Fuel Economy (CAFE) standard for passenger cars has been 27.5 miles per gallon since 1990. Mark went through the list of cars, checked their miles per gallon, and found that the average fuel economy was 23.4 mpg.

The best fuel economy goes to EPA Administrator Lisa Jackson, whose 2008 Toyota Prius and Honda Odyssey minivan average 33 mpg. At 20 mpg, Vice President Biden's chief economist Jared Bernstein's 2005 Honda Odyssey is the worst. For more analysis, check out the original post.

CAFE Standards: Fed Task Force FAIL [William & Mary American Constitution Society]
(Photo: fallenposters

The original story:
Dominion Hope, a gas company in West Virginia, sent Michael a huge gas bill this month. On it, they indicated that the latest reading was a real reading, not an estimate. Michael checked his meter himself and saw that the "actual" reading they billed for was in fact off by about 13 thousand cubic feet (MCF) let's just say "a lot."

He's been asking around and has found three other people who have also been overcharged for "actual" readings. We called Dominion and spoke with a CSR, and they verified that an actual employee came out to the address and read the meter. If he did, then that's one incompetent meter reader.

We'll go ahead and post the first part of Michael's story, and the original photo, so that future readers can see why there was a misunderstanding.

We get our heating gas from Dominion Hope, and after receiving a $200 bill for one month's gas I got suspicious, mainly because we keep the heat at about 50 degrees during the winter. (My fiancée and I are just out of college and used to roughing it so we can save money; our roommate previously studied in Alaska and ‘has put up with worse.') I went out to check the meter and rapidly became confused. The bill said that a human had read the meter at 992.4 million cubic feet on December 26, 2008, yet looking at the meter, I read it on Feb 7, 2009 as 979 MCF, or a difference of about 20 million cubic feet [really, about 13 MCF. -Ed.]. Given that 10 MCF costs about $150 in our area, this comes to a pretty substantial sum!

Remember to always compare the reading on your bill with the actual reading on your meter. It's easy to do—here are some instructions if it's your first time.

RELATED
"How To Read A Water Meter"

Some experts believe that right now, before consumers begin taking advantage of lower gas prices and buying large SUVs and Hummers again, would be a perfect time to enact a national tax on oil, natural gas, or coal, far up the supply chain. It’s quite possible that this tax would be passed down the line to consumers in the form of higher prices, perhaps amounting $1 per gallon.

A CNN Money story last week looked at the two major options currently under discussion: a "cap-and-trade" law that would put limits on greenhouse gas emissions, or a simple—but steep—tax on carbon dioxide. The cap-and-trade option would require more administrative oversight to enforce and would lead to "higher prices for everything from electricity to manufactured goods, as companies are forced to either clean up their emissions or buy permits to pollute." The tax would be more transparent and easier to implement, but would be passed on to consumers at the pump in the form of (for example) a $1/gallon fee.

The carbon dioxide tax is highly unlikely to appear any time soon because it's politically toxic, even if it was used to offset other tax breaks elsewhere.

What do you think? Significantly higher prices at the pump, or slightly higher prices across a range of goods in the marketplace?

"Is it Time to Add a Significant National Gas Tax?" [Consumerism Commentary]
"Does the country need a big gas tax?" [CNN Money]
(Photo: ^riza^)

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!)

By bypassing the normal credit card payment processors and their fees, and using ACH (Automated Clearing House) transfer instead, National Payment Card (NPC) offers transaction savings to the merchant that can get passed back to the consumer in the form of cheaper gas.

For security, none of your financial info is stored on the card and the card is protected by a PIN.

I found some online reviews in this messageboard that say you do save and it's legit (despite the decidedly unimpressive website. The hugest drawback is that there appear to only be six gas station locations in the country that accept it, and they're all in or around Austin, Texas. According to a press release, however, NPC is trying to gear up for a national rollout.

Even if it's of limited utility, it's a good concept and I'm always interested in seeing something that disrupts the hidden back network of credit card processing fees, which, as we showed you recently, costs consumers about $50,000,000,000 a year.

How to turn your driver's license into a debit card [CreditCards.com] (Thanks to Rudy!)
Rollbackprice.com [Official Site}

Pretty much every gas and electricity company relies on estimates. It's labor intensive to manually read every meter in a city, especially when meters aren't easy to access because they're behind a gate or locked away in a basement. To cut down on estimated bills, make sure your meters are easily accessible, or see if you can make an appointment for the reading so that you can be there to let the employee in.

If you live in an apartment, you should check with the complex's management to make sure that there's not a problem reaching the meters.

And finally, check your bill each month to make sure the reading is Actual and not Estimated—there should be a code or notice somewhere on the bill that tells you this, and if you can't find it you should call the billing department and ask for help locating it.

(Photo: The Jamoker)

He writes:

I received several $50 gift cards for Exxon Mobil this Christmas. The cards were payed for with cash (I asked my Aunt, who gave them to me), and the card clearly states on the back "This gift card is not a credit card". When I went to use it at my locall Mobil (Astoria Blvd in Queens, NY), they charged me the credit price! I went in to complain, but the clerk mumbled something that I couldn't understand and I was in a hurry. Just wanted to alert your readers... Exxon Mobil gift cards are a bad deal. Cash will go further.

PS. Is is even legal to have a credit price in New York?

Nope, it's not legal in New York, Rob. Check out this from Just Ask Asa:

Nine states in addition to New York prohibit merchants from adding surcharges to credit card transactions: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma and Texas. Credit card issuers, including Visa and MasterCard, generally forbid credit card surcharges too–although they allow cash discounts.

A lot of gas stations seem to be ignorant, willfully or accidentally, about the surcharge issue. If you live in a state that forbids them, you should report the station to your attorney general's office. If you live in another state but you think the sation is in violation of its credit card merchant agreement, you should contact the credit card company and the parent company of the gas station. And buy your gas elsewhere.

In this case, Rob, you should definitely report the station to the New York Attorney General—their consumer helpline is 1-800-771-7755.

RELATED
"Is This $0.10 Credit/Debit Surcharge On Gasoline Allowed?"
"NY Attorney General: 25% Of Gas Stations 'Engage In Deceptive Practices'"

Consumer spending rose in 0.6% in November — its largest gain in 2 years.

“The declines in gasoline prices have been extremely large, larger than anything we’ve seen in the past,” said Dean Maki, chief United States economist at Barclay’s Capital. “That’s providing a lot of spending power to households.”

Gasoline prices have plunged to $1.66 a gallon from their July peak of $4.11 as Americans drove less, construction projects were halted and the global appetite for oil waned in the economic slowdown. Filling up a 15-gallon tank now costs about $25, compared with $60 this summer.

“It’s a very substantial amount of money that’s been freed up,” said Abiel Reinhart, North American economist at JPMorgan Chase. “That’s a definite positive for consumers. It’s probably the only positive at this point.”

The good news from a personal finance standpoint is that you're not just spending all the money you're saving on gas. The Commerce Department reported that the personal savings rate increased by 1% in November.

Drop in Gas Prices Offers a Bit of Relief for Consumers [NYT]
(Photo: C. Barr )

Thursday afternoon saw crude oil trading below $36 a barrel, says Bloomberg. JP Morgan chase is warning that the possibility of $25 barrels of oil in the future is "hard to dismiss."

JPMorgan Chase & Co., the largest U.S. bank by assets, reduced its 2009 average oil price forecast to $43 a barrel from $69 as a global economic slowdown causes a contraction in demand. The prospect of oil falling to $25 is “hard to dismiss amid a serious deterioration of economic conditions and building stocks,” the bank said in a report released yesterday.

Oil Falls Below $36 as Worsening Economy Increases OPEC Doubts [Bloomberg]
(Photo: beebo wallace )

Christopher Elliott has a few ideas, here's our favorite. It's the return of the road trip!:

Here come the drivers! The Transportation Department has been complaining about a shortfall in road tax revenue. Wait until next summer, when a lot of pent-up demand to hit the road sees hundreds of thousands of vehicles unleashed on American highways.

See the USA in your Chevrolet... (before they no longer make Chevrolets...)

With oil prices spiraling toward $40 a barrel mark, what does that mean for travelers? [Tripso]
(Photo: improbcat )

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.

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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.

Note: if you can't view the GOOD site, click here for the full graphic.

"Gas Prices" is issue #4 in the free "GOOD Sheets" series from GOOD and Starbucks. Each issue focuses on one topic, and unfolds from a square about the size of a CD case into a large graphic that explores the topic in stats, pics, and captions.

This week's topic is the price of gas, while last week's was immigration. Tomorrow a new one hits the stores on "The State of America's Schools."

"Getting Gas" [GOOD]

"We lost about 1,000 gallons of gas and about $3,500," Mimi Zidan, owner of the Lucky Mart on Derby Street, said Wednesday. "But I don't feel too bad because the people looked so happy when they were buying gas. If I can do this for them, that's all right."

The attendant on duty accidentally adjusted the pumps to sell gas for 35 cents instead of $3.50, and during the two hours before they were corrected people called their friends to tell them about the mistake.

The result was that the situation at Derby and South Fifth streets was totally chaotic, with traffic backed up in all directions when Zidan returned to the store.

"I thought it was an accident," Zidan said. "For the first 10 minutes I didn't know what to do. I didn't want to say you must stop, the price is wrong."

But once the police came in and restored some order, she felt better.

Her sister, Amy Habal, who helps run the store, said it would have been nice if someone had told them about the mistake instead of calling their friends.

"But my sister is very kind, she does not think bad about people," Habal said.

Lucky customers pump 35-cent gas [Peoria J-S] (Thanks, Eyebrows McGee!)
(Photo: spinadelic )

If I had to put a date on it, I’d say things won’t be normal for two more weeks,” said Kenneth B. Medlock III, an energy expert at Rice University, in Houston.

Meanwhile, consumers are going from being "good sports" about the shortage to getting downright angry about it.

“At first I was a good sport, but this is getting ridiculous,” said Marsha Lewis, 43, an administrative assistant who lives in Dacula, Ga., and commutes to Atlanta. “I drive an hour to work every day, and looking for gasoline has become my entire life.”

The shortage was caused by combination of refinery damage and power outages in Texas, says a spokesperson from the Petroleum Marketers Association of America, but there's also plenty of blame being doled out to panicky consumers.

“You hear stories about tankers pulling into gas stations and people are already waiting — and they have half a tank,” Dr. Medlock said. “It’s akin to hoarding.”

Frustration in the South as a Gasoline Shortage Drags On [NYT]
(AP photo/Jason Bronis)

#atlgas [search.twitter] (Thanks to Elizabeth!)

Today I ordered 4 utilities without giving my SSN to any of them, and the last 1 of the 4 was AT&T. I asked nicely to not give it. When the CSR ask for my SSN I said "gosh, I really don' t like giving out my SSN, is there a way I can get your product (the specific gas, electricity, tele. service) without giving my SSN." The gas and electricity will do a deposit - spread out over 4 months and after 9 months of consecutive payments I get my deposit back. When I asked AT&T I got the following "We need it in case you don't pay and we need to find you, and you need it to give your SSN to get any utility." I countered with 'I've just got water, electricity and gas TODAY without giving my SSN.' The CSR relented and then asked for my birth date. I got a local service land line from AT&T without giving my SSN.

The takeaway: if you're willing to leave a security deposit, some companies may accept that instead of your SSN. And it never hurts to ask—if the CSR won't budge, you might try calling back at another time to see if you find someone who's more willing work with you.

(Thanks to Jess!)
(Photo: Beige Alert)