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Why the West Coast is ripe for a series of gasoline refinery disasters, glitches, or hiccoughs

At this time, California refineries are operating at about 89% capacity, up
from about 84% last year, according to OPIS, the Oil Price Information 
Service. At the same time, gas prices are perilously close to reaching the 
$4 a gallon average benchmark price across Southern California. 
 
The spot market price for gasoline has softened based on reports that 
major refineries are back online and producing gasoline after the spring
turnaround.

What this means is that we are at a temporary tipping point. At this time, the
price of fuel SHOULD be declining due to an over-supplied market, yet refiners
will probablydo their utmost to push prices higher in the next couple of weeks with
an announcement of a major shutdown, fire, or a series of announcements about
minor production problems that could put a pinch the gasoline pipeline and raise
the price of wholesale fuel. 
 
The reports that most major refiners are back online have resulted 
in a 3 cent decline in the overall average price charged to Indies since 
Monday, and about a 3 cent INCREASE in the wholesale prices charged to 
branded dealers, even though gasoline supplies are abundant.  
 
My take on this is that the Major Brands are sending a message to the 
Indies along the lines of "Hey guys, if you don't discount your gasoline,
we won't discount the prices we are charging to your competitors. If
you don't discount, neither will we, and everybody makes money... got it?
Nod, Nod, Wink, Wink... just be cool and we'll all be selling $4 a gallon 
gasoline with great profits for everybody." 
 
At this time, the average break even retail price for an unbranded
Independent dealer is about $3.67. At the current average price of gasoline
in Southern California, that gives a typical Indy a  very healthy 28¢ per 
gallon profit. Meanwhile, for a branded dealer, the average profit per
gallon is about 14¢.
 
Since dealers really need to make about 20¢ a gallon to stay in their 
profit "comfort zone" we are likely to see prices go up a little at branded 
stations, with a few Indies dropping their prices slightly.
 
Why I expect Refinery problems soon ...
 
Whenever I see the wholesale market  moving in two different directions like this
(i.e. "up" for branded stations, and "down" for Indies) amidst reports of abundant fuel
supplies, I expect to see an announcement of a major West Coast refinery fire or an
unplanned shutdown or announcement of a series of production hiccoughs and glitches
at at either Tesoro, Chevron, or Valero in the next 14 days. 

All three of these refiners have multiple refineries, and by shutting one of their 
operations down,they can significantly increase overall profits per gallon from their 
remaining refineries by encouraging panic on the spot market.
 
Here's how it works (and I'm just using round numbers to illustrate): If your 
factory makes a $1 a unit in profits per widget by operating two factories, 
you will profit $1,000 per thousand units sold. BUT, if you shut one factory 
down and the resulting "widget shortage" causes the prices to increase, you 
may be able to make $3 profit per widget from your remaining factory. In other
words, you can potentially triple your overall profits by selling 50% LESS 
product. 
 
The result is a perverse market incentive where the factory that delivers the 
least amount of product to the market at the highest price ends up making the 
most money. This is what happened when the electricity markets were arbitraged
in California during the electricity crisis at the turn of the century. The 
power companies quickly learned that by intentionally shutting down an electric
power plant, they could double, triple, or even quintuple the profits at other 
electric power plants. 
 
Once you understand that major refineries make money by selling less fuel at 
a higher profit per gallon, then you truly understand how the California 
market works, and why we need more competition at the refinery level.  
 
Contact Charles Langley at (858) 752-4600