The reason gas prices are so high...

[widebody911]

While I'm not an industry insider, this seems to make sense.

http://consumerist.com/5062765/why-is-gas-so-expensive

[sammyg2]

I do work in the industry, and while that is basically correect it is over-simplified and has several gross miss-representations. He read up on the subject but not very well. Examples in parantheses below:

Refineries

Refineries are the temples where crude oil gets Bar Mitzvah'd into gas. Shifts in the refining world over the past two decades have helped ratchet up the price of gas. In the early 80's, there were over 350 refineries, mostly owned by the oil companies. The oil companies didn't see refining as a place to generate profit, but as an integral part of a larger operation (they tried to make a profit but the supply was so large and competition so fierce they were lucky to make 1%) .

By 2002, there were only 153 refineries, (although the capacity was drastically increased so the refining capacity had nearly doubled) and most of them were no longer controlled by the oil companies (BS. Don't know where he get's this from, all refineries are owned by oil companies, hense the name. Maybe he meant major oil companies vs. independent oil companies?) .
Refineries are now held privately and independently, and as with any independent businesses, profit is key. It is in the refiner's interests to supply only as much gas as is absolutely needed to stay on the profitable side of the supply and demand curve. (BS. Refineries run full tilt, make as much as is humanly possible. They don't throttle back unless there is a serious glut of fuel and they simply can't sell what they are making. That happens about once a decade or less).

Gas emerging from a refinery is sold at what is known as the 'rack price.' The rack price is the cost of gas to dealers, and it is generally influenced by the spot and futures market. The rack price is also where branded gas begins to exert a price premium.

Branded gas from Exxon-Mobile (there is no "E" on the end of mobil), BP-Amoco, etc, isn't different from the unbranded gas found at Joe Schmoe's Gas Shack (BS, the gas is basically the same but the additive package is quite different). Still, there are several costs associated with branding gas. The brand name carries a premium, since people might associate it with quality, and not grossly overcompensated executives. Branded gas is also sold under contract, giving buyers long-term stability that can't be duplicated by unbranded gas (branded gas is also sold on the spot market) . Oil companies also add value to branded gas by providing ancillary benefits that command a price premium, like branded advertising and branded credit cards.

Refiner pricing strategies are almost as complex as the mating rituals of the red-sided garter snake. Though refiners want to maximize their profit, they don't necessarily want to gain additional market share. Refining capacity can't simply be ramped up on demand (they ruin as much as they can run, there is no ramping up or down). Acquiring and refining crude oil takes considerable time, leading refiners to take a slow and steady approach to business. First and foremost, refiners care about fulfilling their contractual obligations. Leftover gas can be sold for profit on the rack.

If a refiner's rack price is consistently too high, dealers will take their business elsewhere when their contracts expire. If the rack price is too low, buyers might swamp the refiner, leaving it unable to meet its contractual obligations (only "extra" gas is sold on ther rack or spot, they can't be overwelmed or sell to much) .

To ensure pricing continuity, refiners used to call each other and share pricing information. (not in the past 20 years or so or they'd be in jail) Activist judges on the Supreme Court called this "collusion." The refiners, unfazed by the justices, came up with a crafty alternative: publicly posting their rack prices. Somehow, the Ninth Circuit Court found this to be illegal, too. Nobody knows how refiners discuss their pricing arrangements nowadays, but we wouldn't be surprised if it involved a members-only group on Facebook. (BS, making crap up because he doesn't have a clue. refining and fuels marketting is the most highly scrutinized industry I know of. )