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Gouge Away: Not many motorists understand the real reason gas prices have skyrocketed and won't come down. Hint: It's not because of Hurricane Katrina.

The Great Golden State Gas Swindle

Think you're paying more for gasoline because of natural disasters? That's just what the scamming oil industry wants you to believe—but it's not true.

By Peter Byrne

Once upon a time in a San Francisco eatery, anti-trust lawyer Joe Alioto drew me a diagram on a napkin. His scrawl traced the fate of John D. Rockefeller's Standard Oil of New Jersey—the holding company that controlled the world's oil market until it was broken into separate entities under the Sherman Anti-Trust Act shortly before World War I. The Supreme Court ruled that Rockefeller's monopoly dominated oil producing, refining and distribution by "conspiring to restrain trade."

But Alioto explained how the remnants of the oil trust (Exxon, Mobile, Chevron, Amoco, etc.) have effectively recombined through mergers and market sharing. Although the oil colossus redux is not yet doing business again under one logo, and one set of books, modern refining technology has made the anti-collusion statutes of the Sherman Act as obsolete as oil lamps, Alioto said.

Now, energy consultant Tim Hamilton explains why it matters.

"Hurricane Katrina is not responsible for three dollars a gallon in the western United States," he says. "The latest round of price increases started a week before Katrina."

A former gasoline dealer, Hamilton works for a consortium of western state gasoline retailers. He is widely recognized as an expert critic of oil corporation refining practices, and recently engineered a series of studies for the Foundation for Taxpayer and Consumer Rights (FTCR) of Santa Monica that detail the methods by which the reborn colossus manipulates gasoline supplies and, therefore, pump prices in California.

It's true that the East Coast and the Southern states are experiencing price increases driven by the loss of refining capacity on the Gulf Coast. But the idea that California's skyrocketing gas prices are driven by the same problem is a smokescreen.

As Hamilton points out, 66 percent of the crude oil refined into gas in California is mined right here on the West Coast. In fact, the California market is relatively independent from fluctuations in the availability of foreign or Gulf Coast oil.

The Conspiracy That Isn't

What's really happening is that gasoline brands ship crude oil into their western refineries in accord with a "just in time" marketing scheme, i.e., the corporations avoid creating large inventories, making it impossible to meet suddenly increased demand. And when they deliberately withhold crude from their own refineries—by shutting down refineries, or shipping crude to Chile—they create a supply shortage. This leads to a jump in pump prices, and increases refining profit margins (by $15.5 billion since 2000).

It is all about "mogus," the term for the generic gasoline that the refineries ship, via co-owned pipelines, into jointly controlled holding tanks. When a tanker truck pulls up to the mogus tank, it is filled with generic gasoline that is treated with each brand's additives as it flows into the truck. Consequently, oil executives know exactly how much mogus is flowing in and out of the tanks and to whom in real time. Their ability to access one another's supply information without "conspiring" enables them to passively collude without picking up the telephone.

Here is how it is done, according to Hamilton: A Chevron Texaco executive looks at the amount of his gas flowing into the central tank via shared pipelines, say 100,000 gallons a day. He decides to sell 20,000 gallons of refined crude to Chile instead of sending it to the central tank, thereby creating a shortage of his brand's contribution to the shared mogus stockpile. Oops, he says, we have a shortage, we have to raise the price because there is more demand for our brand than we can supply.

In a truly competitive market, his customers would drive to a Mobil station for a lower price. But Mobil now raises its price because of the increased demand for its product now that Chevron Texaco's prices have risen. Of course, the Mobil executives are watching the inflow-outflow at the mogus tank just as carefully as the Chevron suits. When Chevron cuts back on its contribution to the mogus, Mobil can cut back on its own contribution in tandem. Then the refining divisions of both companies justify the jacking up of gas prices because of the low supply situation they have artificially created—and neither loses customers to the other.

Family Businesses Hit Hard

This is not "price fixing" by a "cartel" of the Rockefeller variety, says Hamilton. It is simply a "rational" reaction by individual companies desiring to maximize their refining margins when supply diminishes for whatever reason. Pooling this type of data is not illegal under the antiquated Sherman Act. From January to June this year, California oil refiners inflated profits in this manner by 61 cents per gallon.

Meanwhile, family-owned gas stations are going bankrupt. Unbeknownst to the customer, the wholesale price increases days before it is reflected at the pump. The retailer is constantly behind the mark-up, having to pay for gas at a higher price before it can be sold at a lower price. He can only hope to earn back the difference when and if prices fall. Meanwhile his 3 percent credit card fees skyrocket in tandem with prices. The 10 cents a gallon he needs to pay his rent and employees and register a profit are eaten up by these extra costs.

Of course, the international energy corps would like to play the same game with refining profit margins everywhere, but on the East Coast, for example, it is harder to choke off supply since there are more potential sources of crude oil flowing into terminals in the eastern United States. Ironically, California has the capability of becoming self-reliant because of its easy access to locally produced crude; but this is turned upside down when the monopolists artificially deflate the supply until consumers react by reducing demand. Then prices fall. Another way prices fall is that East Coast refining operations, seeing the high profits to be taken in the West, start sending their gasoline westward, which lowers pump prices. Hamilton points out that this option is not currently available to us, because the Katrina effect has drastically reduced supply in the East.

Do Caps Work?

Hamilton says that the price caps on gasoline instituted by the state of Hawaii have failed, because they were tied to East Coast price indexes. He hopes that as the mainland market cools, the caps will make more sense, although they have to remain close to mainland prices, in order not to repel the mogus from making the trip to Hawaii.

Using Hamilton's data and analysis, the FTCR suggests that the state build a gasoline reserve system. Millions of gallons of potential gasoline storage space is currently available under gas stations that tend not to use the full capacity of their premium tanks. Premium gas is no longer necessary for performance, except for special types of automobiles, so the state could mandate that stations sell only regular gasoline. The increased supply can be stored in the unused premium tanks and become available during times of increased demand, or genuine supply shortage.

Predictably, the oil brand trade group, Western States Petroleum Association, based in Sacramento, blames high state gasoline taxes and environmental regulations for skyrocketing pump prices. A spokeswoman for the trade association said she could not comment on the shared pipelines and mogus tanks "because of anti-trust considerations." But do not look to the Schwarzenegger government or the legislature for relief. California is one of the few states that collects a percentage sales tax on purchases at the pump. When prices rise, so do state tax revenues, by $1 billion this year alone.


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From the October 19-25, 2005 issue of Metro, Silicon Valley's Weekly Newspaper.

Copyright © 2005 Metro Publishing Inc. Metroactive is affiliated with the Boulevards Network.

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