Coping With Gas Pains: Are We Getting Gouged?

We're talking larceny. Robert Saroki, a Marathon gas-station owner in Wixom, Mich., keeps hearing stories of crazed drivers smashing the glass on other stations' pumps. Steve Glazer says customers at his Flushing, N.Y., Mobil station are so angry he is going to wear a helmet to work. Says Glazer, who has watched his profit margins erode to nothing: "I'd like to know who's making all the money."

This time, it's not OPEC. At $28 per bbl., crude oil prices may be high. But America's current gasoline-supply problem is its own. No new refineries have been built in over two decades; indeed, the opposite has happened as refiners took excess capacity off the market. Inventories are nearing historic lows. Any disruption in the refining process or distribution system chokes gas supplies, driving prices up.

When OPEC turns the tap off, it takes a few weeks for American consumers to feel the effect at the pump. The lag time for retail prices depends primarily on gasoline inventories. But when there's a fire at an Illinois refinery, as there was on April 28, it takes only a few days for the price of gas to spike at pumps in Detroit. Combine a fire in one place with a new regulation in another and you've got a national price spike like the one that happened last year, when a Michigan pipeline burst in June.

So who's making the money? A Federal Trade Commission investigation in March ruled out collusion among the oil companies, who have been in a consolidation mode since the late '90s. And relative prices are still lower than they were in the '60s. That's not to say refinery profit margins haven't increased handsomely from the supply squeeze. Operating profits have surged this year at refiners like Valero and big oil companies like BP Amoco and ExxonMobil. "Refiners have made a killing over the past 15-to-18 months," says Chris Stavros, an oil-industry analyst at UBS Warburg. Stavros points out that the suppliers aren't gouging; they are simply reaping the benefits of market economics swinging their way.

Ironically, a big contributor to high gasoline prices has been good environmental intentions. A web of regional clean-air regulations require that up to a third of all gas sold in the U.S. be blended in complex ways for cleaner emissions. The regulations are strictest in California, where, not surprisingly, gasoline is most expensive. Blending costs an extra nickel per gallon in the Golden State and 3[cents] in smog zones in other parts of the country. Because there are more than a dozen types of "reformulated" gasoline, every refinery faces added costs.

The crunch could ease later this summer. Massive productivity increases have already led to added capacity, and increasing inventories should stall soaring prices and lower refiners' margins. Still, the refining and distribution system is severely strained. If rolling blackouts in California hamper refining operations, supplies could thin out again, not just in the West but throughout the country, as distributors race to reroute gasoline. If there are no disruptions, then wholesale prices should drop. The real question is whether gas-station owners like Saroki and Glazer, hurt so badly these past months, will pass those savings on.

--By Frank Gibney Jr., with reporting by Julie Rawe/New York