From Elliott.org:

The agent asked for our ticket for our son. I will not go into all of the details, but an hour later (and 35 minutes to flight departure), we were forced to pay 332 euros ($423.10) to get my son a ticket so he could return back to the states.

Words cannot describe my outrage at the time, especially the justification of the fees ($320 fuel surcharge - $160 each way??!!). How can they legally charge that much when our ten pound infant does not even have a seat?

Delta responded to this complaint with a form letter explaining that kids need a ticket — which is 10% of the regular fare. The only problem? He'd already paid that fee when he booked the tickets. The $320 was explained to him as a fuel surcharge.

Should passengers who don't even get a seat and weigh 10 lbs be charged this fee? Seems a little silly doesn't it?

Waaaa! Baby gets socked with surprise $320 fuel surcharge on Delta flight [Elliott] (Thanks, Shaula!)
(Photo: So Cal Metro )

From Consumer Reports:

Throughout the Northeast, skyrocketing fuel costs have lit a fire under the firewood business. The demand is sparking severe shortages ahead of the home-heating season, says Sarah Smith, forest-industry specialist at the University of New Hampshire cooperative extension. "If I called up 10 folks in the firewood business and asked them for a cord of dry wood, they'd all laugh," she says.

The firewood shortage started this summer, when soaring oil prices motivated more people to consider heating their homes—or supplementing their oil, natural-gas, electric, or propane heat €”with wood. "The loggers and firewood producers who were predicting and processing wood based on their usual demand couldn't accommodate all these people, many of whom hadn't burned wood in the past," says Smith.

CR has some tips for those of you who are wood shopping this fall. Most important? Make sure your chimney is in good condition, but don't get scammed by disreputable chimney liars.

Firewood and wood pellets become a hot commodity [Consumer Reports]
(Photo: saramarie )

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.

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]

From the NYT:

In response to the falling value of their homes and high gasoline prices, Americans have become more frugal all year. But in recent weeks, as the financial crisis reverberated from Wall Street to Washington, consumers appear to have cut back sharply. Even with the government beginning a giant bailout of the financial system, their confidence may have been too shaken for them to resume their free-spending ways any time soon.

Recent figures from companies, and interviews across the country, show that automobile sales are plummeting, airline traffic is dropping, restaurant chains are struggling to fill tables, customers are sparse in stores.

When the final tally is in, consumer spending for the quarter just ended will almost certainly shrink, the first quarterly decline in nearly two decades.

The Times says that when the government releases the numbers this month, they are expected to show that consumer spending shrank by 3%, which would be the steepest decline since 1981 and the only decline since 1990.

Consumers are apparently buying more groceries, enjoying fewer meals out, and spending less on clothes, school supplies, and air travel. Nintendo Wiis, however, are still flying off shelves.

“My view is that when consumers get concerned about their nest egg, or their country, they need entertainment,” said Bo Andersen, president and chief executive of the Entertainment Merchants Association, which represents distributors and retailers of home entertainment products.

Full of Doubts, U.S. Shoppers Cut Spending [NYT]
(Photo: robinryan )

East Tennessee and Middle Tennessee both primarily receive fuel supplies through spurs of the Colonial pipeline, which carries refined gasoline from the Texas Gulf Coast to the Northeast. [Hurricane] Ike damaged and knocked out power to many of those refineries, cutting the amount of gasoline fed into the pipeline.

The shortage should be remedied by next week, the paper reports:

The state is scheduled to receive 1.42 million barrels of gasoline over the next week, roughly matching its typical demand of 1.44 million barrels, Heidt said.

"Gas prices remain higher in Middle Tennessee" [The Tennessean] (Thanks to Jessica!)
(Photo: Pat Hawks)

Oil Is Cheaper, But Airline Fees Are Here to Stay [WSJ via Consumer World Blog] (Photo: Maulleigh)

Starting tomorrow, all tickets purchased for flights after Nov. 10 will be subject to the new fee. Members of the military traveling on orders, "Premier" frequent fliers, and first or business class customers will be exempt from the charge. Reuters says that United expects to increase its revenue from "merchandising efforts" (including baggage fees) by $700 million in 2009.

Meanwhile, airline stocks "mostly rose" as oil prices fell below $96 a barrel, after reaching as high as $147 over the summer, said the AP.

Airline shares rise on falling oil, upgrades [Forbes]
United Airlines doubles second-bag fee to $50 [Yahoo!] (Thanks, Liz!)
(Photo: Zonaphoto )

(Thanks to everyone who sent this in!) (Photo: zncjmom)

When Barbara Troxell started one in 2004, she started by putting flyers in neighbors mailboxes. After getting about 14 people together, she started calling up dealers to see if they would offer a group rate discount. The group negotiated a $40 discount off a $179 annual plan, got downside price protection, with a pre-season boiler check included. Now the group is up to 50 people.Through collective buying power you can negotiate a better deal to buy in "bulk" than you can individually. For more info and tips on the nuts and bolts, check out this article.

How to Save Money by Starting a Fuel Oil Coop [Furnace Compare] (Photo: Getty)

Andrew writes (to Jiffy Lube):

My wife and I purchased a home this spring with a nice garage. I could finally change the oil in my wife's car. She needed her oil changed badly and had gone to you before. Your team had tightened the nut to the oil pan too tight (pneumatic tools I'm sure), so I mentioned to her to have your shop change the oil and to please ask them to not over tighten the nut so I could release it for the next change.

My wife spoke to a member of your team and asked them to not over tighten the oil plug if possible. Not only did she get a horrible look from both the team member and the employee standing next to him, the oil plug head was completely rounded off smooth.

In order to remove the plug without damaging the oil pan, I had to hammer a wrench head 1/16th size too small onto the plug head to kind of form it into the wrench. I then had to use that same hammer to hit the other end of the wrench in order to loosen the plug. I now had a ruined plug and ruined wrench.

The new Pontiac G6 has a new size plug different than most cars. I found this out when I had to run up to the car parts store to buy a new plug. They didn't have any of the new plugs and I had to wait a week for a new one, thus rendering the car un-drivable.

Neither my wife, myself, friends, or family will ever use your services again.

We asked Andrew if he was certain the oil plug had been purposefully tampered with, and he says he's sure:

Yes, they filed it by over tightening it with a pneumatic drill. The drill's pressure was so high that the tool stripped the ridges off the bolt, thus making it almost impossible for me to remove without bringing it back into their shop.

You could say it was job security for them since they saw a potential customer about to leave and do it themselves.

He also included a picture of the ruined plug. Yikes. What do you guys think? Would someone do this on purpose?

Oil Prices Tumble Again; Stock Markets Surge [NYT] (Photo: hanapbuhay)

...the results were well short of Wall Street expectations and its shares slumped 3 percent.

Apparently, earnings from competitor Royal Dutch Shell got everyone's hopes up when their profits jumped 33%. Poor Exxon.

Oil Profits Shatter Records [Huffington Post]
(Photo: whatatravisty )

ShopSmart [Official Site]

"Our cost structure today, in advance of this restructuring, resembles that of airlines much larger than we are, with national and even global networks, flying larger aircraft," Hoeksema wrote to employees.

"Following our restructuring, we will not have the larger aircraft and revenue generation capacity to support our current cost structure. Even the exemplary service you provide and the customer loyalty it engenders cannot overcome this disadvantage in the new energy environment of $140-a-barrel oil."

Midwest must decide whether to "fix this disparity so our costs better match our revenues, file for Chapter 11 and try to fix it there, or ignore it and fail as a business," he added.
..."This reflects our belief as a management team that we should lead by example and that we bear ultimate responsibility for keeping our airline competitive," Hoeksema said.

Hoeksema's salary was about $405,000 in 2007, and he received a bonus of about $446,000 in 2006.

Midwest CEO to take 40 percent salary cut; other employees see pay reduced [bizjournals] (Thanks, Everyone!)

Your website has changed my consumerist ways forever. I read "Gotcha' Capitalism" this weekend and decided to take back my rights as a consumer.

1. Our mortgage was paid up in October and I didn't realize that Wells Fargo had the real estate tax payment scheduled for semi-annual. Got the county tax bill with a penalty of $18. Called a county clerk, explained my situation and got the charges removed. Savings: $18

2. Checked my Wachovia account and found a $35 overdraft fee from November. Stopped at the bank regional main branch. Someone please explain to me why, in a 10-12 story Wachovia building, my escalated customer service request needed to be handled off-site by someone in meetings all day. At the end of the day (literally) 2 fees removed. Savings: $70.

3. Called around to price out heating oil costs and the best I could do was $3.34-$3.39/gal. Negotiated with Petro for a 1 yr. contract @ $3.09. I have 2 tanks x 275 gals x 5 deliveries. Savings: $687.50

4. Kids gave me an iphone for Christmas. Ported # from Verizon. ETF on current bill. Followed your script (including reading the legalese several times to the annoyance of the csr.) Waited 10 min. and savings: $175

5. Comcast. No success here. Offered to downgrade to basic cable-phone bundle ($109 with 2 year contract! Does this mean FiOS is getting close to my neighborhood?) Savings: $0

Total savings for week's work: $950.50
Regaining some financial control: Priceless

-Moriconi

(Photo: Kai Hendry)

Seems kind of unfair that everyone gets charged the same, regardless of how long their flights are. What about prorating it based on how much fuel is actually getting used on the flight?

Northwest Airlines - Lone Holdout on the $50 Roundtrip Airline Ticket Fuel Surcharge [Rick Seaney]
(Photo: smcgee)

Eligibility is determined with two questions: First, do you live in one of these 16 states?

Maine, Vermont, Massachusetts, Rhode Island, Connecticut, New York, New Jersey, Pennsylvania, Virginia, Washington DC, Delaware, Maryland, Alaska, Wisconsin, Michigan, and Indiana.

It's almost sweet of our communist friends to shove the inequalities and harsh realities of capitalism in our faces with a program that actually helps people pay for an increasingly unwieldy cost of living expense.

For more information, call Citizens Energy at: (877) 563-4645, or fill out their online application.

Individual Households [Citizens Energy]
(Photo: Don Emmert/AFP/Getty Images)

UAL raises surcharge to offset soaring fuel costs [a wire service]
(Photo: Ben Popken)

I don't even know what Kohl's is. I'm guessing some sort of mass-crap superstore, like Best Buy or Target or T.J. Maxx or a weird amalgam of all of those and it doesn't really matter because last Friday they opened at 4 a.m. for the mad rush of Black Friday shoppers, because if there's one thing you want to do when your body is groggy and sleep tugs at your heart and your dreams have turned vacant and sad, it's grope cheap waffle makers before sunrise.

Until there's a profound shift in how we approach the world, in how we view the goods we buy, in how Black Friday and the rape of Canada are grossly, inextricably connected, we cannot effect much change. Much as I love the green movement and the Buy Nothing movement and the Slow Food movement and all the rest, in the face of the countless billions still to be made by raping the planet for oil, they're merely the equivalent of trying to water the rainforest with an eyedropper.

"We haven't seen the full pass-through yet," Energy Information Administration head Guy Caruso said.

Today's national average is $3.105, up 39% from last year. Oil prices have risen approximately $20 a barrel in the past two months, and gas prices are up $0.30.

Drivers' price at the pump could rise by 20 cents [USAToday]
(Photo:amanjo)

• gasoline prices - In a surprise to no one, they'll go higher.
• home heating costs - If you use heating oil, you could see a steep increase of over 25%. Homes using natural gas may see an increase of about 10%. Propane households will see a 20% increase, while homes that heat with electricity should expect a relatively small 2.7% bump.
• airfare - Airlines will want to raise prices because jet fuel is already an enormous expense for them—but unless the whole industry plays along, it's a risky thing to do. There's a good chance international fares will go up while domestic fares remain relatively competitive, especially if the economy remains soft.
• shipping - Ah, the hidden cost of online shopping! You can expect retailers to offer discounts or free shipping during the holiday season, but rates may go up after that passes. Higher transportation costs can also trickle down into things like groceries, so prices may go up there as well.

"What $100 Oil Means for Your Wallet" [SmartMoney]
(Photo: Getty)

The Sun-Sentinel analyzed state inspection reports from 2004 to 2006. The analysis found 580 of more than 2,500 stations in South Florida had at least one pump dispensing more gas than customers paid to purchase, while 477 provided less fuel than they should.

"If you go to the grocery store and buy a gallon of milk, you expect a gallon of milk," said Jason Toews, co-founder of Gasbuddy.com, a consumer advocacy site that tracks gas prices. "The same goes for gasoline."

It's unclear if Florida's pump failure rate is higher or lower than in other states. In 2003, a national survey by the National Conference on Weights and Measures, found a 6 percent failure rate on gas dispensers tested in 2002. South Florida's failure rate in recent years mirrors the nation.

34 percent of area gas stations fail pump tests in last three years [South Florida Sun-Sentinel]
(AP Photo/Matt Rourke)

The did not, however, address the real issue with IHOP: Sticky tables.

Stop the insanity. Buy some sponges.

IHOP to stop use of trans fats [BusinessWeek]
(Photo:MattMcGee)

Actually, according to the article, "Higher gasoline prices can reduce obesity by leading people to walk or cycle instead of drive and eat leaner at home instead of rich food at restaurants." The study's author, health economist Charles Courtemanche, said he got the idea for the study one day while pumping gas—he was thinking that if it got much more expensive, he'd have to take public transportation, which would increase his daily exercise (via walking) by 30 minutes per day.

Gas hit a record high of $3.22 per gallon this past May.

"Higher gas prices seen trimming down Americans" [Reuters]
(Original photo: Joe Shlabotnik)

The FTC said high gasoline prices in the spring and summer of 2006 were caused by

1. regular seasonal effects from increased demand in the summer
2. increases in the price of crude oil
3. increases in the price of ethanol
4. reduced production by refiners
5. damage to refineries from Hurricanes Katrina and Rita in 2005
6. increased demand for gas

The lone dissenting statement, from Democrat Jon Leibowitz, is brief enough to include in its entirety here (or you can download a pdf copy with footnotes from the FTC website):

The oil industry, which posted record profits in 2006, should not view this Report as in any way a vindication of its behavior. Commission staff identified some plausible justifications for the unexpected and dramatic price spikes that bedeviled consumers in the Spring and Summer of 2006, and that raised the average price of gasoline to more than $3.00 per gallon in August of that year. The fact remains, though, that most of what we did here was develop a theoretical model for why gasoline prices likely increased. This is not an unreasonable approach, given that just last year we completed an exhaustive investigation into gasoline pricing in the aftermath of hurricanes Katrina and Rita. That investigation found price gouging by refiners under the Congressionally mandated definition and, beyond that, disturbing conduct by even more petroleum companies. But the question you ask determines the answer you get: whatever theoretical justifications exist don't exclude the real world threat that there was profiteering at the expense of consumers.

"FTC Finds No Evidence of Gas Gouging in '06" [SmartMoney]

"FTC, Antitrust Division Send Report to President on Factors Explaining National Average Gasoline Price Increases During Spring and Summer of 2006" [www.ftc.gov]

(Photo: Getty)

The corn price increases flow like gravy down the food chain, to grocery stores and menus. The cost of rounded cubed steak at local Harris Teeters is up from $4.59 last year to $5.29 this year, according to TheGroceryGame.com, which tracks prices. The Palm restaurant chain recently raised prices as much as $2 for a New York strip. And so on.

(Photo: Eduardo Mueses)

Corn is in the coffee whitener and Cheez Whiz, the frozen yogurt and TV dinner, the canned fruit and ketchup and candies, the soups and snacks and cake mixes, the frosting and gravy and frozen waffles, the syrups and hot sauces, the mayonnaise and mustard, the hot dogs and the bologna, the margarine and shortening, the salad dressings and the relishes and even the vitamins. (Yes, it's in the Twinkie, too.) There are some forty-five thousand items in the average American supermarket and more than a quarter of them now contain corn.This goes for the nonfood items as well: Everything from the toothpaste and cosmetics to the disposable diapers, trash bags, cleansers, charcoal briquettes, matches, and batteries, right down to the shine on he cover of the magazine that catches your eye by the checkout: corn. Even in Produce on a day when there's ostensibly no corn for sale you'll nevertheless find plenty of corn: in the vegetable wax that gives the cucumbers their sheen, in the pesticide responsible for the produce's perfection, even in the coating on the cardboard it was shipped in. Indeed, the supermarket itself—the wallboard and joint compound, the linoleum and fiberglass and adhesives out of which the building itself has been built—is in no small measure a manifestation of corn.

The Rising Tide of Corn [Washington Post]

Curbly has a list of 25 things you can do with olive oil other than cook with it.

You can polish your furniture, make chapstick, moisturize your cuticles, fix a squeaky door, control hair frizz, free a stuck zipper, and so much more. Just remember to use cheap olive oil!

Don't waste the good stuff. —MEGHANN MARCO

25 Alternative Uses For Olive Oil [Curbly]
(Photo:zesermelda)

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.

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. — CAREY GREENBERG-BERGER

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(Photo: Getty)