Sunday, October 7, 2012

Update on the Gasoline Situation in California


October 11, 2012: there are reports that reformulated gasoline stocks had been rising despite refinery fire, pipeline contamination; price of gasoline rose sharply despite rise in stocks;

October 9, 2012: Chevron's Richmond (California) facility will be closed for rest of year; worse-case scenario being played out; 

October 9, 2012: "Gasoline prices at the pump in California rose to a record overnight even as Governor Jerry Brown directed state regulators to allow refineries to produce more supply by shifting to winter-grade fuel." No one really expected prices to drop back that fast after a political speech. (Political? He's trying to save his tax increase initiative. The refineries were already in the process of switching. Bloomberg confirmed the WSJ observation below:
The state’s gasoline markets are particularly susceptible when refineries have outages because California is mostly cut off from the oil-product pipelines spanning the rest of the country, according to the U.S. Energy Information Administration. Gasoline in California also has its own blending requirements to reduce smog and it’s difficult to import from other states. 
"California is mostly cut off from the oil-product pipelines spanning the rest of the country": it's called a moat. A MOAT!

October 9, 2012: from yesterday's WSJ, op-ed, page A16: California's green gas shortages: prices are spiking thanks to state mandates that will only get worse.

The lede:
Californians are grumbling about a gas price spike, which state officials blame on disruptions in the supply chain. Actually, they're paying through the nozzle for their greener-than-thou government. 
Wow, I said the same thing, either below or elsewhere. The price of gasoline spikes in California due to a minor refinery fire and "contamination" in a pipeline. That was it. That caused the spike?
Let's see what the WSJ has to say, along with my comments interspersed:
Because of California's stringent regulations, the state has essentially isolated itself from the rest of the country. At a different post, an uninformed reader commented that the spike did not make sense; there were other refineries in the US. That's true.
Unfortunately, they don't blend gasoline to California's specifications. There is another state that is isolated from the rest of the US: Hawaii. Hawaii also the highest gasoline prices of the 50 states, historically. Hawaii and Californa are isolated from the rest of the US when it comes to energy, but for different reasons.
From the op-ed piece:
Over the last two decades four refineries in the state have shut down rather than investin expensive upgrades to comply with fuel regulations. The biggest killer was a 2002 ban on the additive MTBE, which refiners had to replace with ethanol. The California Air Resources Board has estimated that this reformulated blend adds five to 15 cents to the cost of every gallon of gas, but Californians pay a premium whenever a refinery shuts down.
And there's more:
... Jerry Brown told regulators to let refiners produce winter-blend gasoline early this year. But even "normal' gas prices in California are about 30 cents higher than the natioanl average thanks to its fuel standards and a 50.5-cent gas tax that is second only to New York's 51.3 cents.
And there's more:
Any relief Californians feel will be short-lived. The state's cap-and-trade program, which charges businesses for emitting carbon, will take effect this November. Oil companies warn they'll pass on the costs to consumers. Meanwhile, a low-carbon fuel standard kicks into high gear in 2015. That's when regulators expect the new generation of biofuels like cellulosic ethanol to be plentiful, though such fuels aren't commercially viable. Midwest ethanol won't comply. 
Bottom line:
If all of California's 2006 global warming law were implemented, the [Boston Consulting Group] study estimates the cost of gas would increase by up to $2.70 per gallon. By the way, Californians are already paying up to 50% more for their electricity than the rest of the country thanks to their renewable-energy portfolio standard.
And then this zinger:
In related news, EPA chief Lisa Jackson says California is her model for the nation.

Later, 6:42 pm: I guess the governor of California read my original post below. He has finally stepped in, saying that refineries can switch to winter blend immediately, taking whatever steps necessary to get more supply to his frustrated constituents. Showing some spine. Huge political risk to try to lower gasoline prices. Seriously: the governor's proposition to raise income taxes is at risk.

Later, 12:23 pm: The price of gasoline in California went up another nickel overnight.The good news: the price looks like it may stabilize. The bad news: the word "stabilize."
California motorists faced another day of record-breaking gasoline prices Sunday, though relief appeared to be on the way.
In its latest update early Sunday, AAA reported that statewide average price for a gallon of regular unleaded gasoline is $4.655.
Saturday's average of $4.6140 was the highest since June 19, 2008, when it was $4.6096. The four-penny-per-gallon jump Sunday was less than Saturday's increase, which was 12 cents.
Sunday's price, like Saturday's, was the highest in the nation, with the Golden State leapfrogging Hawaii as the state with the most expensive fuel due to a temporary reduction in supply. Californians are paying 24 cents per gallon more than motorists in Hawaii, according to the AAA report.
I guess if Hawaiians can afford it, so can Californians. There is no spike in the price in Hawaii as far as I know. The California state officials are strangely quiet. One can be assured if this was happening in New York state there would be all kinds of senatorial hand-wringing.

Oh, speaking of which, on a different note, there is a report out there today, that California is just a couple votes shy of having a Democratic super-majority in the legislature. I take that as great news for the Bakken. This simply means less chance that California will do much about its faltering oil and gas industry.

Original Post
Link here to Wall Street Cheat Sheet:
The problems at refineries are at the crux of the issue. Chevron’s  245,000 barrel-a-day refinery in Richmond, California, caught on fire in early August and has not yet returned to full production.
Furthermore, a Chevron pipeline that transports crude oil from the south to the north has been shut down due to contamination in the oil.
In southern California, two refineries owned by Phillips 66 are closed for scheduled maintenance, and an ExxonMobil refinery is recovering from a power outage that halted production.
Because of the gasoline shortage, Valero announced Thursday it had stopped selling gasoline into the California spot market. Valero, the largest refiner in the United States, operates two refineries in California with a combined capacity of 213,000 barrels a day and will continue to supply gasoline to its branded and licensed retail stations in the state.
But while soaring gas prices are unfortunate, as Tom Kloza, chief oil analyst for Oil Price Information Service, told Reuters. “This is not something that is going to last for months. This is something that is going to last for days or weeks.
The "weeks" part is concerning. "Weeks" can easily turn into months.

I really shouldn't add this next part because of all the comments it will generate. But I don't understand this. It does not cost any more to buy the oil or refine the oil, so why are refiners able to charge more, or if the refiners are not charging more, why are the service stations allowed to charge more? Yes, it's supply and demand, but during hurricane evacuations in which the disaster is forecast well in advance, and folks have plenty of time to prepare, the first thing we seem to hear when the price of gasoline goes up peri-hurricanes, is the word gouging.

Q: How is a hurricane in Louisiana different than what is going on now in California with regard to scarcity of gasoline? A: The hurricane is a natural event; not controlled at all by humans. Everything mentioned above with regard to California is 100% man-made/man-caused or somehow related to human activity: fires, scheduled maintenance, regulations, pipeline contamination.

I really don't know, but if the only difference is natural disaster vs man-made situation, perhaps that's the reason. 

Why is the state of California not stepping in, and capping all price increases until the refineries and pipelines return to "normal"? In the meantime, simple rationing would prevent ensure adequate gasoline for all. To the best of my knowledge, there is no "shortage" of gasoline per se; there is a shortage of gasoline at the margins.

I'm not looking for a political discussion, or an "economic" discussion per se, I'm trying to figure out how gouging is defined. I'm almost afraid to ask. Smile. I would love to put up a new poll on this very subject, but I don't know how to ask the question succinctly.

The situation in California is likely to last "days to weeks." The "shortage" of gasoline in a hurricane evacuation lasts days at most, never weeks. 


  1. Retail gas stations have less product to sell so to keep profit of the enterprise at prior levels they need to cut expenses or increase revenue , since gas retail is self serve , owners can't cut labor. To my way of thinking gouging would come in if retailers go above prior profit levels knowingly. PRight now, this is a supply shock so retailers are probably overshooting their profit target in a volatile fast moving environment as consumers are in somewhat of a mild panic
    buy mode. Also, whatever limited ability to drive less needs time to happen. The price spike literraly happened "overnight".

    1. You know, that's a pretty good explanation. Thank you. I can see some counter-arguments, but there are some good points there. I think it's the independent service stations that are not getting their deliveries. Franchise stations are probably getting their full or near-full allotment. If so, they should not be raising their prices. But again, I'm not arguing with you. I'm just trying to sort out the reasoning regulators use when determining if gouging is occurring or not.