In the last 48 hours, gas prices in San Diego have surged by nearly 10¢ a gallon. At $4.07 a gallon, San Diego's gas prices are the highest on record for any February in County history, including the year 2008, when gasoline prices hit an all-time record high of $4.64 a gallon on June 13, 2008. This trend is paralleled by a a national average of more than $3.54 a gallon, which is also the highest price on record.
Since last Monday, San Diego prices have increased 17.6¢ a gallon.
According to a report published in Businessweek last Wednesday, two major Southern California refineries have shut down for maintenance in order to comply with State and Federal clean air mandates. These annual shutdowns are famous for causing shortages and price spikes. Every spring, refineries must change their gasoline formulation to accommodate seasonal changes in air quality. The summer blend is more expensive to produce and requires a shutdown of the refinery. Refiners must then buy their fuel on the "spot market."
How the spot market affects your gas prices
When a refinery shuts down, it will often buy the fuel it needs from other refiners, who sell it for cash on the spot. This is where the term "Cash on the barrel head" and "cash on the spot" come from, and it is where the term "spot market" originates.
Spot fuel is surplus fuel. In San Diego, there are a large number of gas stations that sell surplus fuel at deep discounts. These stations are the independents that aren't affiliated with a major brand such as Chevron, Shell, Arco, etc. Normally, unbranded independents are the most competitive players in San Diego's retail gas market. Usually, an unbranded station will charge as much as ten or twenty cents a gallon less for its gasoline than a brand-name competitor. Brand name retailers, on the other hand, must pay a predetermined "rack price" for their gasoline, which is almost always higher.
Because the unbranded stations are intensely competitive, they tend to force the prices down. But right now, surplus gasoline is hard to find. On Thursday, we reported that average retail price in San Diego was $3.96 a gallon, but our estimate of the price an independent dealer must charge to break even was $4.06 a gallon, which is more than many brand names stations are charging as their retail price. This phenomena, where unbranded dealers pay more for their gasoline than brand-name dealers is called a "rack inversion," and in our experience, rack inversions are always accompanied by higher gas prices on the street.