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A possible record-breaking price surge for Southern California gasoline is underway.

We are predicting that gas prices will surge from 5¢ to 17¢ a gallon by
Monday morning, June 24.


Globally, oil, natural gas, and finished gasoline prices have
flat lined, but in California, wholesale prices have surged and
the retail price is about to follow in the wake of reports that
Exxon's Torrance Refinery is down for the count in a knockout blow
that could keep it offline for the next 14 days. The refinery was
scheduled to go back online, but x-rays of critical pipelines showed
a severe weakening of the walls that could have resulted in a
disastrous rupture in the plumbing that transfers 600 degree Fahrenheit
crude oil. This is the same type of problem that Chevron experienced
on October 2, of 2012, when workmen jabbed at a thinning pipeline
wall with a steel pike and unleashed a firestorm that sent 1,500 people
into hospital emergency rooms and a column of black, filthy
toxins thousands of feet into the air.

In this context, Exxon's decision to make the costly repairs is
admirable, and responsible, but the cost to consumers will be higher
fuel prices in the coming weeks. As soon as Exxon found out about the
problem, it began buying up every surplus barrel of gasoline it could
could find.

The Exxon Torrance refinery produces roughly 7.8% of the gasoline
consumed in California. Any other problems at a large refinery, or
even the rumor of a problem, could send prices to record levels
not seen since the Chevron disaster last year when California gas
prices reached a 100-year record high of $4.72 a gallon.


At the wholesale level, the price of fuel for unbranded independents
has jumped an average of 32¢ since Monday, and 34¢ since Thursday,
despite official reports of big builds in California's gasoline supply.
For branded retailers, the price hikes have been less devastating,
averaging only 16¢ since Monday. But the reality is, whether a dealer
pays a 16¢ price hike, or a 32¢ price hike, it is bad news. The only
good news is that a few dealers haven't figured it out just yet, and
have not raised their prices. As soon as they are forced to buy more
gasoline, they'll be passing along the pain to you in the form of higher


Normally, unbranded stations buy surplus fuel. Because the surplus
fuel is cheaper, they can buy it at a discount - usually at a price
that is 10 to 20¢ a gallon less than a typical brand name station. These
dealers pass the savings on to you in the form of lower prices. Because
unbranded dealers tend to offer the lowest price, they perform a critical
role in maintaining competition in the market place. Essentially,
unbranded dealers set the price floor for gasoline, and when their prices
increase, the price floor is raised.

When an unbranded dealer pays more for his or her gasoline than the
branded dealer's "rack" price, the phenomena is called a rack inversion.

In 15 years of studying gas prices, I have never seen a major rack
inversion that did not result in a substantial retail price hike.


June usually brings gloomy weather and record high prices for the year.

I've noted before how gas prices usually peak in mid-June for the
entire year, and how surprisingly that hasn't happened in 2013, but
if current trends continue, we may see an all time high for the year
in late June or early July.

So far this year, the record high price for gasoline in Southern
California was $4.31 a gallon on February 28, which is 28¢ higher
than today's average of $4.03 a gallon ... that means a record-breaking
price is still far away at the retail level, but at the wholesale level,
the prices are already forming in the pipeline. At this time we estimate
that the average independent dealer must charge $4.22 a gallon just
to break even on the gas he sells.

Whether we reach a record price for the year in June depends on what
happens in the next ten days. If another refinery goes down, or if
prices don't reverse from the sudden jumps we have seen in the last
three days, prices could easily reach record levels for the year 2013.

And if there are too many pinches in the pipeline, we could potentially
see a repeat of last year's all-time record high of $4.72 a gallon.