Retail gasoline prices have moved up sharply in broad sections of the country, but it is supply, and not price that I’m worried about for the next few weeks.  Incredibly diverse pump prices will be the norm, short-term, for a broad swath of the country.

   Think of the U.S. Gulf Coast as the lungs of an advanced organism (something with more sophisticated DNA, let’s say, than Geraldo Rivera).

   Hurricane Gustav partially collapsed the right lung and some of the oxygen was cut off to the American organism. Then, just as that lung was being brought back to normal, Hurricane Ike collapsed the left lung. The prognosis for the patient - -in this case U.S. motorists and other end-users - - is good, but we’ll be coughing and wheezing with supply outages, disclocations, and even a few gasoline lines for the next few weeks.

Pricing Diversity

   Motorists may see pump prices in a given market vary by 50-75cts gal or more in the next few days. They may inaccurately conclude that the retailer at $4.50 gal is “gouging” or making considerably more than the retailer at $3.75 gal.

   (For an update of retail prices visit www.fuelgaugereport.com)

   Here’s why there are such tremendous differences in retail prices, and such huge disparities:

   Wholesale prices are all over the place at the moment. Gulf Coast unleaded gasoline in barges or pipeline batches fetched a spot price of $4.50-$4.75 gal on September 11 and 12. This spot price is a bit like the LIBOR rate that determines interest rates for many companies in the United States. Many companies - - and particularly unbranded chains that don’t fly a major flag - - buy gasoline at a price that is each day indexed to this spot price. Because of these formulae, some distributors and retailers received price increases of $1.00 gal or more in the last few days - - they buy gasoline like corporations borrow money, at a recognized benchmark reference plus a differential.

   Other retailers buy gasoline from major and independent oil companies at prices that those refiners post at more than 300 downstream tank farms and terminals. About 99.99% of the time, they base their decisions on pricing in reaction to the spot market. But after Katrina, and most likely after Ike, many of these companies will in effect adopt their own de facto price controls and absorb some of the higher costs, or give up some of the opportunity for huge profits.

Image Management, Responsibility, or Altruism - - Take Your Pick

   First a key note: OPIS is a fiercely independent publisher, and I personally hold no shares in oil stocks, bonds, or any other such instruments. Our organization writes very critically about all elements of the oil supply chain.

    A bipartisan majority of the public regards oil company executives as slightly more evil than Slobodan Milosevich and Josef Stalin. It’s a bum wrap, although some petroleum CEO’s haven’t helped, doing such disingenuous things such as constantly  blaming OPEC for high prices even when other events conspired to send crude or products’ prices up to renaissance number. Some majors; and I won’t name them; are about as warm & fuzzy as an Olympic luge track.

   Many of the oil companies have workers that were displaced by Hurricane Ike. These companies also have long term relationships that they need to protect, and are generally staffed by responsible people who have more in common with the readers of this blog, than with Kenny Lay, John Rockefeller, or J.R. Ewing. They face some logistical challenges (a wonderful Wall Street word . . .) that will be quite taxing in the next few weeks.

Where Does The Market Go From Here?

    I maintain that we’ll see many retail gasoline prices around $4 gal through the remainder of September, and perhaps into mid-October. If not for Gustav & Ike, we could expect prices to average closer to $3.00-$3.25 gal. If the oil industry were to price gasoline opportunistically, we would be looking at $4.50-$5 gal gasoline short term, but we won’t see that.

   The oil futures market - - much more the province of financial companies and longer term hedgers and speculators - - has tumbled well below $100 bbl for crude, and October gasoline futures are in the $2.60’s.

   Hurricanes do destroy demand for crude, so I have no problem with the weakness in crude. But I think the trading community has underestimated the period of time that Gustav and Ike-inspired downtime will haunt U.S. supply. Refineries can’t operate without the reliable support of local utilities and my sources believe Texas refinery

processing capability problems will stretch into late September.

   The bottom line: Prices will be as chaotic as a Fellini movie through the remainder of September, and make about as much sense as some of the Italian director’s plot lines. Supply is the worry, but people need not panic. We’ll get through the various downstream dislocations, allocations, outages, and even gasoline lines. If I could paraphrase Kipling and the Beatles::

     If you can keep your head about you when all about you are losing theirs and blaming you  . .. . . then it’s gonna be all right..