California gas prices: what happened and what’s next?

150 150 Christopher Nelson

California motorists saw gasoline prices spike about half a buck in a matter of two weeks to start off the month of October. With Libya and Syria unstable and the spectre of an Israeli-led war against Iran still looming in the minds of market-watchers, the first and easiest explanation resides somewhere in the volatile Middle East.

But it’s actually a combination of several factors unique to California that caused a spike that no other state in the country saw. Yet we mobilized as if under attack over what, as Dan Walters calculates, amounts to an extra $30/month for a normal commuter. He continues:

U.S. Sen. Dianne Feinstein led the parade of political hysteria, demanding a federal investigation, and several other politicians followed suit. Some political operatives quickly retooled their TV ads and mailers to depict opponents as tools of the oil industry, a usual political whipping boy.

The political reaction was especially ironic because it’s evident that political policy, rather than market manipulation, played the major role in what happened.

The fire at the Richmond Chevron refinery may be old news in terms of the 24 hour cycle, but the capacity issues caused by the August blast are hitting home now.

But how could issues at one California-based refinery have such a dramatic impact over such a short period of time in a state known to be a motorist haven? Don’t we have reserves? Doesn’t the state have more power to prevent supply-side price gouging on the part of oil companies?

The answers, as usual, are not black and white, and as a result, Mr. Walters may have been oversimplifying the issue.

The California Progress Report mentions the reform recommendations handed down by a committee in 1999, the last time we saw a surge in fuel price of this magnitude over a short period of time. Author Jamie Court, who was on said panel, has this to say:

About a decade ago, after some sharp, unexpected price hikes, then-Atty. Gen. Bill Lockyer formed a gas pricing task force that included industry experts and me. We viewed industry documents and cross-examined industry representatives. Among the conclusions: “Supply disruptions that contributed to major price spikes of 1999 are likely to continue … because (1) California refiners have little spare capacity to cover outages; (2) California refiners maintain relatively low inventory levels.” The report also noted: “Refiners have significant market control.”

The task force recommended a series of measures, including building a strategic gasoline reserve that could flood the market when supply is most scarce. But the Legislature didn’t listen. And now we are near 5 bucks a gallon.

So oil companies are in the driver’s seat economically. The Legislature took no action. These things are not newsflashes. However, what some Californians may not know is that due to some of the strictest carbon-emission regulations in the country, we also have “summer” and “winter” blends of gasoline that are unique only to our state and comply with all internal demands of fuel composition.

As soon as the spikes occurred, Gov. Brown allowed refiners to switch to the less scarce winter blend of gasoline, which, according to Dan Walters, halted the upward march of gas prices and stablized them at the $4.60 statewide average we’re seeing now.

[more info on the difference between summer and winter blends here]

But as Court suggests in a separate, more extensive op-ed he wrote for the Los Angeles Times, we are still at the mercy of a handful of companies controlling a commodity that the entire state depends on:

Over the last decade, Californians have consistently paid prices that are 10 to 20 cents a gallon higher than the rest of the nation, and we have lower inventories. The rest of the continental U.S. has about 24 days of gasoline on hand; California’s average is 10 to 13 days. Not surprisingly, over the last 10 years, refineries on the West Coast consistently have been among the most profitable in the continental U.S.

On the horizon is a potential business transaction between BP, Arco and Tesoro, detailed in Consumer Watchdog, that would grant a 51 percent share of the oil market in California to one entity according to recent reports. A letter the group sent to Attorney General Kamala Harris contained the following:

“If the purchase goes through, Tesoro and Chevron will between them own more than half of California’s fuel refining capacity, including the three largest refineries in the state,” the letter said. “California’s drivers and the state economy will pay the price for this merger at the pump. We ask you to halt it on antitrust grounds.”

So now that you know a bit more about what’s happening behind the curtain at your local gas station, what do you think the solution is? Let us know in the comment section below.


Christopher Nelson

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