Wilson Beach's customers let him know in no uncertain terms when the price of gasoline is too high. They stop pulling up to the eight gas pumps at his Chevron station in District Heights.

"I'm just convinced that people are just riding the streets looking for price," Beach said. "The minute you move {on price}, you can tell at the front window that the customer is paying attention to it."

So Beach keeps a constant eye on the competition on Marlboro Pike's gasoline alley, where even a penny-a-gallon edge can make a significant difference in sales, he said. "A penny a gallon can mean as much as 500 gallons a day in pumping," Beach said. "People will notice the difference."

This sensitivity among Beach's customers demonstrates the increased attention being paid to the way oil industry is setting prices following Iraq's invasion of Kuwait Aug. 2. Nationally, gasoline prices are up nearly 20 cents in the past month, to their highest level since 1982, according to the American Automobile Association.

The sudden jump has angered consumers and ignited accusations that oil companies are gouging customers to ring up big profits. The Justice Department is investigating the rapid rise in prices, and there have been scattered calls in Congress for a new round of controls on oil companies.

But oil company officials say the allegations are the result of misunderstandings about how their business works and how pricing decisions are made. They say they are victims themselves of an oil market run wild and that they are only passing along their own higher costs. In fact, they argue, the average price of gasoline has not risen as much as their costs of crude oil since the Iraqi tanks headed south.

The pricing story begins at oil wells in the Middle East or Texas, where viscous black crude oil is pumped out of the ground and then moved thousands of miles by tanker or pipeline to refineries, where the crude is transformed into aromatic, amber-colored unleaded gasoline. A complicated distribution system delivers the gasoline to Beach's Oakcrest Chevron station.

Along the way, decisions are being made almost constantly about its price, with input from economists and executives at Chevron headquarters in San Francisco, commodities traders in New York and Stamford, Conn., refinery managers in Port Arthur, Tex., distribution officials in Towson and, finally, by Wilson Beach.

The decision-making process takes into account information from industry-wide price-tracking services, ever-changing commodities prices, technical requirements of Chevron's refining and distribution system, market and competitive forces. The prices reflect the lessons of years of experience in the oil business and the need for everybody involved to earn a profit that makes the whole process worthwhile to them -- profits that at some stages, and in some instances, can be quite large.

But in the end, the oilmen say, it is the customer who decides how well these decisions were made -- an increasingly fickle customer, who will patronize another brand in an instant if the price is a penny or two a gallon cheaper.

"Competitive forces determine what the marketplace will be," said Jim Huckaby, manager of pricing and supply for Chevron USA, the oil company's refining and marketing division. "The supply-demand factors always work."

The Oil Market: Setting the Price of Crude

A few weeks ago, not many people had ever heard of the New York Mercantile Exchange. Now millions of people know what it is -- the commodities market that determines the price of oil in most of the world.

In the New York Merc's frantic trading pits at the foot of the World Trade Center in lower Manhattan and elsewhere, crude oil and petroleum products are traded for spot delivery or on a more speculative futures basis. Either way, the price is sensitive to a myriad of market forces, not the least of which is the constant flow of news and rumors from the Middle East's flash points.

Feeding on fears of war and disruption of crucial Persian Gulf oil supplies, speculators have driven the price of crude oil to a level nearly double that of just a few weeks ago.

More than anything else, this speculation is responsible for the increase in prices that motorists are paying for gasoline, since virtually all world oil prices are tied in some way to the price of a barrel of crude traded on the exchange, also called Nymex.

As those prices have skyrocketed, crude oil producers have been perhaps the biggest beneficiaries. For the nations and companies that pump crude out of the ground, production costs have changed hardly at all, turning the increase in price into almost pure profit.

Oil companies say, however, that they have not raised product prices as much as crude oil prices have risen, reducing their potential profit. In addition, even companies like Chevron -- large, commercially integrated firms that produce, refine and sell petroleum -- generally don't produce enough crude oil to meet all their needs, forcing them to go into the market to purchase oil, at something very near market price.

The companies also argue that early reports that they were enjoying huge profits on oil they had already purchased were greatly exaggerated. Most refining systems churn through crude so quickly that on-hand supplies of oil last for only a few days at best, forcing them to raise prices to cover the costs of replacing the oil. And oil en route to refineries from domestic or overseas oil fields is almost always paid for on a when-delivered basis, meaning that the company pays the market price for the oil when it reaches the refinery, rather than the cheaper prices that might have been in effect when it was first pumped into the pipeline or ship.

The price increases in recent weeks have stirred concerns about the power of the commodities market to set oil prices -- a phenomenon that did not exist just a few years ago, before trading of crude oil and petroleum product futures became commonplace. But oil industry executives and analysts say the New York Merc provides a centralized, market-driven mechanism for determining oil prices that is inherently fairer than the more arbitrary methods used in the past.

The Oil Trader: Filling in the Gaps

Don Couch describes what he does as being similar to filling a shopping list. Chevron must purchase from others about one-third of the crude oil its refineries need and Couch's job is to seek out these additional barrels of oil and match them to the needs of Chevron's various refineries, each of which produces a somewhat different mix of products and requires different qualities of crude oil.

To do so, Couch works the phones constantly from his trading office in Stamford, Conn., one of four trading centers maintained by Chevron around the world. He keeps in regular contact with traders at other companies, always looking to buy or sell oil for Chevron at a price favorable to the company.

This task puts Couch on the periphery of the oil market, at least the one defined by the New York Mercantile Exchange. But he is very much affected by what happens on the exchange. He and his counterparts at other companies are constantly watching price fluctuations on the Nymex, using those prices as the basis for their own negotiations.

Each deal generally involves a tanker-load -- somewhere between 500,000 and 900,000 barrels worth, enough to keep a good-sized refinery going for two or three days. "You don't need to do many of those," said Couch, who generally does a deal or two a week.

As crude prices have soared in recent weeks, Couch's job has gotten tougher. Worried about future supplies, Chevron is relying heavily on purchased crude oil, using almost none of its own. Many other companies are doing the same. That makes the market ever tighter, putting upward pressure on prices. "When the market's moving, the prices are moving and there's not much you can do," Couch said.

Still, he said, "You're always trying to do the best deal you possibly can. If I'm buying, I want to get it lower than wherever the market is perceived, and if I'm selling I want to sell it for more."

At the Refinery: Optimizing Output

The Compaq 386 computer on Johnny Green's desk can do a pretty good imitation of the sprawling refinery outside his office.

Green, manager of planning and analysis at Chevron's Port Arthur refinery outside Houston, uses the computer to simulate refinery operations to determine the most efficient -- and profitable -- way for the refinery to process the crude oil available to it.

"We simulate the refining process for a barrel of crude, for a type of crude, and determine what its ultimate value for a group of end products is," Green said. "You couldn't afford to pay $28 for a barrel of crude and have it produce $25 worth of product for very long."

The computer model takes into account such variables as the 310,000-barrel-a-day refinery's seasonal output mix -- more gasoline in the summer, more heating oil in the winter -- as well as operating expenses, refinery flow rates and product prices. The resulting analysis is used to help oil buyers such as Don Couch decide what kinds and quality of crude oil to buy, and at what price, and to help Chevron's marketing department decide how to price the products made by the refinery, which supplies Chevron distributors in the Washington area.

"We have as much information from both sides of the pipeline as we can," Green said. "Our job is to basically try to be as efficient as we can, to maximize the value of the barrel of crude oil ... and to try to put it into the hands of the marketing department as close to the customer's needs as we can."

The Wholesale Distributor: Tacking the Marketplace

To Bill Locke, pricing manager for Chevron's mid-Atlantic regional office in Towson, what's happening in the Middle East is as important as what's happening on Marlboro Pike in District Heights.

That pretty much defines the range of factors that Locke must take into account in setting wholesale prices for 22 distribution terminals and 335 gas stations in an area that extends up and down the coast from Maryland to North Carolina and as far west as Illinois.

"The whole thing runs on a smaller, local level, but takes into consideration all world activities," he said. "It involves every little facet as it comes down to making your final choice."

Locke relies on market information from gas station operators in his region, reports from his field representatives, data from industry news services such as Platt's Oilgram News and even what's going on on the futures market in New York, which gives him an idea of what traders see down the road.

Taken together, and mixed with efforts to compete effectively with various other gasoline sellers in individual markets in the mid-Atlantic region, these factors help Locke decide the wholesale price of gasoline for each market in his region.

"Locally, you review each area and try to be competitive in the marketplace using your own strategies," he said. "You have to be competitive, make the right moves, so that your company can operate in any area."

The Gas Station Owner: Shoot-Out on Marlboro Pike

Wilson Beach says he doesn't know what he will have to pay for gasoline until the long tan and white Chevron tank truck pulls up at his station to deliver a load, which happens about twice a week.

"They used to call us and tell us when there was going to be an increase," he said. "Now we wait until the tanker is dropping the gas."

Beach said he sets his pump price a few cents over the wholesale price on the invoice given him by the tanker driver, enough to cover expenses and give him a small profit. "I'm lucky if I can net 2 or 3 cents profit" on regular gas, he said, and slightly more on the higher grades. Beach's station sells about 100,000 gallons of gas a month, giving him a monthly profit of a few thousand dollars. Income from service operations and the sale of cigarettes, candy, lottery tickets and auto accessories help cover operating expenses and keep gasoline profit margins thin.

Although many in the oil industry say some gas station owners have taken advantage of the current oil crisis to widen their profit margins, Beach said his pump price increases reflect only the changes in his wholesale price, about a dime in all. "Even though my price went up drastically, I'm still operating at the same margin I had before," he said.

It's a constant battle. A few days ago, Beach said, he noticed his sales volume beginning to decline. With competitors down the street holding the line on prices or even dropping them a bit as their wholesale prices came down, customers began drifting away.

So Beach cut his prices -- a penny on regular unleaded, to $1.119 a gallon, and a couple of cents each on the higher grades.

"I saw it slipping away again," he said. "I just dropped the price ... and took it right out of my pocket."