Gasoline price is influenced by 5 things:

1) crude oil prices.

Only Saudi Arabia could really manipulate crude prices downwards for any length of time (by boosting production). They no longer have the necessary spare capacity, and thus today, no one can move the oil prices downwards meaningfully.

2) refining margin.

That's the price for gasoline as quoted on markets like NYMEX in the USA. It depends on supply and demand on the gasoline market. That price has been extremely low for most of the late 80s and all of the 90s, as spare refining capacity made competition very fierce. Refining spare capacity is now much lower, which means that prices tend to go up but not down unless you have brutal shifts in the underlying market.

In addition, there are still too many independants and export refiners (esp. Venezuela) to manipulate the NYMEX for more than a couple of weeks or more than a few %.

3) distribution and marketing markups.

There are mostly fixed and linked to technical factors.

4) taxes

Also mostly fixed, with some variations acroos the country.

5) Dealer markup

The margin of the local pumping station. It can vary with local competition, but most dealers are independant and don't get too much interference from their big oil masters. And many are truly independant.

In most cases, margins are razor thin and these gas stations make most of their income on ancillary sales (snacks, cigarettes and the like)

So that's the chain. Now on to the market phenomena over the summer. I'll be quoting - and explaining this lengthy comment which HiD buried in my last diary.



sorry but there is a non conspiracy explanation. Gasoline has a very seasonal price variation compared to crude. The nadir is winter when demand is low and gas is produced as a byproduct to heating oil at the margin. The surplus gets tanked by trader types like I used to be. In order to get us to take it, the price has to drift low enough that you can hedge against May futures without going too far in the hole.



Basically, in winter, you can sell gasoline at the price you can sell it (via the futures markets) for delivery in May, when demand picks up, minus the storage costs, the technical losses and the cost of financing the fact that a lot of money is stuck in these tanks for 6 months.



Go look at NYMEX forward futures prices. The May/May 07 futures crack (mogas - WTI) is $15/bbl which is about what we had last year. This is huge compared to the 90's when refining was in glut worldwide. Typical spring levels were $6-8, winter $3ish IIRC.



The price for gasoline to be delivered in May 2007 is currently in line with what it was in May 2006. HiD notes, as I pointed out above, that refining margins ("crack") are currently much higher than they were for most of the last 20 years, but that's been the case for a couple of years now.



there are no real hedgers to speak of on gasoline so any buyer out that far is speculating. period. End users on gasoline are regular folk who just don't have the means or motive to hedge. On diesel/jet you have trucking co's and airlines that buy forward.



This means that no one buys gasoline in advance on the markets. That happens for diesel and kerosene (truck fleets and airlines can hedge their future prices and thus buy their fuel needs in advance), but not for gasoline. which means that there is no "natural" demand for gasoline in the futures market, and thus the only buyers of gasoline futures are speculators.



After the spring peak, prices stay up as demand exceeds refinery production and the stocks built up are worked off. Prices usually stay up until middlemen lose the fear that supply could run short on them. This is why the EIA stats each week make the market jump. Typically mogas stocks drift down from 230-240 million bbls to 190 million. Below 190, people get panicky and the market stays bid up.



Demand is cyclical, more so than production (refineries cannot change their production runs completely). So stocks build up in the winter, and drfit down in the summer, when demand is higher. As supply is thus constituted of actual production plus stock drawdowns, the leve lof stocks is an important variable in the price setting mechanism.



Above 200 Million in late August and STILL building is a problem for a speculator. Come August 31 your Sept futures are going to go wet. your choices are - take wet bbls or

- roll into Oct (a dead period)

- sell With no hurricane looming to make you a bundle, you have a tough choice to make.



What this means is that if you have committed to buy gasoline in September, and stocks are quite high, you can see a very real risk that, unless something unexpected happens to push prices up (a hurricane of a refinery accident, for instance), you are going to take a loss.

Your 3 options are to:

bet the farm and buy expensive gasoline



delay the reckoning and convert your position into October, which is evne more speculative as underlying demand is even weaker (and possibly already at some cost today)



take your losses and be done with it





If you are a middleman wholesaler, a retailer or a wet oil speculator, you have a similar problem. Come Sept, the system gets flushed of low RVP summer grades. This isn't as big a problem as in spring, but player tend to sell down their stocks to facilitate the spec swing. This is why most years you see a dip in Sept on prices.



An additional factor in the market is that September is the period when refineries switch from summer blends to winter blends (different technical requirements in terms of vaporisation to better adapt to average temperatures), and they have to get rid of their stocks of summer stuff, thus creating a glut in supply in the market.



this year the speculators have stepped into a buzz saw. Based on 2005 with Katrina making prices bounce off the moon, placing a bet came dear. You had to pay up to buy mogas cracks. Meanwhile, most any player in the wet system held a little extra "just in case". Hurricane season was expected to be robust.



Last year, the Sepotember situation was completely different because of the Hurricanes. A bug chunk of the supply unexpectedly disappeared from the market, thus creating a big gain for those that held paper rights to buy gasoline at a previously agreed cheap price.



What actually happened? - no hurricanes.

- refiners ran hard to catch the high margins

- stocks stayed high.

- no major refinery fire/disruptions (I guess BP can only wangle one major fuckup per year)

- Import volumes stayed way up

- Demand was up, but less than anticipated. Come August, the speculators just couldn't hold on much longer and started to sell. If you remember, the hurricane forcast was revised downward sharply about then...



Basically, a lot of people bet that this summer would see the same problems as last year (which was not a completely stupid bet). That sustained demand (from speculators) and prices.

But the underlying market was less favorable (a bit more production from refiners, a bit less demand than expected), and the hurricanes speculators were betting on to give value to their virtual gasoline did not materialise, thus forcing them to sell their gasoline buying rights (in order not to have to take actual delivery, which involves a whole other kind of infrastructure and cost if you're not a physical player in the market)



At the end of August the selling turned into a rout. Mogas cracks the first week of Sept hit $2ish if you believe the prints. They've since rebounded to $5 ish.



Financial speculators panicked, sold out, and drove price down massively.



So believe what you will, but there's no way big oil can coordinate a selling panic. They don't have the excess stocks to do it, nor the control of the Merc.



The market is deep enough that such massive selloffs cannot be provoked without a real underlying reason.



OPEC is clearly keeping production up trying to get crude prices down. They've been giving the market all it wanted all year hence the contango, but going into the lowest demand period, fall, they usually trim production. Now perhaps Saudi want Bush back in (ask Hugo Chavez and Iran about that). But they've been clear they want crude more like $50 than $70 to forstall conservation. Perhaps it's a lucky bit of serendipity. Can't say.



Now getting back to the oil market, HiD notes that producers cranked up volumes as much as they could this year, to keep prices down somewhat - and it worked, in that there is "contango", i.e. spot prices are higher than prices for futures, which means that there is a temporary glut in the market which drives prices temporarily lower than what the market expects them to be in the future.

As HiD notes, producers like Saudi Arabia (if not Venezuela) are wary of too high prices that would encourage alternatives to be developed or worse, conservation, and they are keen to supply all they can to keep prices down.



But on mogas, big oil is not in the drivers seat. Imports, wall street, other traders rule the NYMEX roost. The NYMEX is the key to gasoline pricing in the US east of the Rockies. Perhaps big oil could accelerate the rate the price drop hits the pump. that's about it.



Back to gasoline: it's not the oil market players that rule the gasoline market.

I hope that this shows clearly enough that there are very real market reasons for the current price drop. To simplify things further: speculators bet that there would be problems during the summer, and bought gasoline paper. That drove prices up during the summer. When it appeared that the problems did not materialise and there was excess gasoline (real or paper) in September, the speculators had to fold, and sell at a big loss.

But that's the point of speculation: you bet on uncertain events. This one was not an unreasonable bet in view of last years events, but it did not work out.

What this isn't is market manipulation by Bigoil.

