Gas Prices Rising Despite Plunge in Cost of Crude Oil

As the price of crude oil plummeted on world markets this week, Chevron dealer Zigmond Yee raised the price of gas at his Echo Park station by two cents a gallon after the oil company hiked prices. What gives?

Motorists will be disappointed if they expect a swift reduction in pump prices to match the dramatic drop in crude oil prices, say industry executives and analysts. In fact, gas prices have kept rising and oil companies have tried to recoup the rising cost of crude triggered by the Iraqi invasion of Kuwait on Aug. 2. Analysts say gas prices are unlikely to drop significantly any time soon.

In a nationwide survey, the price of self-serve regular unleaded gasoline increased 3.3 cents a gallon to $1.307 between last Friday and Wednesday, according to the American Automobile Assn. Since Aug. 1, prices have risen 23.2 cents.

Besides Chevron, Atlantic Richfield raised gas prices in the Los Angeles area by nearly 2 cents a gallon earlier this week and Unocal raised its wholesale price by a penny a gallon Wednesday. Phillips Petroleum, however, dropped the average price it charges its dealers for gasoline by 5.27 cents a gallon within the past two days.

The general rise in prices at the gasoline pumps is in marked contrast to the plunge Wednesday of the price of crude. A barrel of West Texas Intermediate, the U.S. benchmark crude, to be delivered in October fell $1.96 a barrel to $25.92 on the New York Mercantile Exchange. The price had stood at $32 earlier in the week. October unleaded gasoline fell a steep 3.81 cents to 84.72 cents a gallon.

The Iraqi invasion of Kuwait sent the prices of oil and gasoline soaring, prompting oil companies to hike prices almost immediately. But now that prices are falling on those same markets, oil company officials claim they can’t make equally swift reductions at the pump for a variety of reasons.

Industry critics, however, claim that oil companies have managed to cover their increased costs by hiking prices even more to distributors who sell to independent gas stations. In some cases, companies have socked independents with 30% increases, said Christopher Dyson, research director for Buyer Up, a nonprofit fuel group founded by consumer activist Ralph Nader.

“The prices of the gas they sell to their own dealers has been restrained,” Dyson said. But the price of the gasoline they sell to independents have not been restrained. A lot of independents are angry about this.”

But companies insist that despite sharp increases, gasoline price hikes this month have not been enough to cover the skyrocketing cost of crude oil. Chevron, for example, says that its crude oil costs have risen an average of 17.3 cents a gallon since the end of July but that it has raised its price to dealers by about 8.5 cents a gallon.

“The bottom line is . . . that we have not recovered even the cost of raw materials,” said James Huccaby, manager of pricing and supply at Chevron U.S.A. “We just believe that it was necessary to raise our prices in the L.A. basin by 2 cents a gallon.”

Unocal said it has raised the price to dealers by 8 cents a gallon since the end of July despite an 11-cent increase in crude oil it buys.

“We have been exercising restraint all along but the public doesn’t see it that way,” said Unocal spokesman Jeff Callender. “The price of crude had been increasing the entire month of July but our prices did not move the entire month.”

In the case of Arco, which had temporarily frozen prices in response to President’s Bush’s call for restraint in oil pricing, the Los Angeles-based company said it had to raise prices to match its competitors. Its lower prices led to shortages at many of its stations, executives said.

“You have got to recoup those costs in the long run or you will go out of business,” said Stu McDonald, vice president of distribution for Arco.

Consultants say all businesses face the same pressure when it comes to raising or lowering prices. “In any industry, you have trouble raising prices,” said Robert Felton, director of the West Coast energy practice for the consulting firm McKinsey & Co. “When your costs go down, you have a tendency for price (cuts) to lag.”

“It’s a natural business decision to protect yourself,” said Barney Groten, executive director of the Energy Center at the University of Oklahoma. “It’s a typical reaction to uncertainty and it’s human nature.”

Oil executives also point out that it is up to their networks of dealers to establish the final pump price. Chevron officials called Yee at the station in Echo Park on Monday afternoon and told him prices were going up by 2 cents a gallon effective midnight.

Raising gas prices is a touchy matter, Yee has learned. Besides customer gripes, his workers were pelted with rocks a few weeks ago when they raised the prices on the station’s signs at night.

Yee waited until Tuesday afternoon to raise prices after a Chevron tanker unloaded its costlier fuel. Yee could have absorbed the 2-cent increase, but that would have eaten into an already slim 5-cent-a-gallon profit margin.