Seeking a fix for California’s gasoline market problems

Severin Borenstein

California’s 1996 switch to a cleaner blend of gasoline than is used anywhere else in the U.S. has raised gas prices but has also reduced asthma, lung damage and other illnesses caused by air pollution. Recent research by my colleagues Max Auffhammer and Ryan Kellogg has shown that the health benefits from California blend gasoline greatly exceed the extra costs we pay.

California gas, known as CARB, costs an extra 10 to 20 cents a gallon to make, which, along with our higher gas taxes, accounts for most of the differential between California’s and the U.S. average price. But occasionally a disruption in the supply of our unique blend causes our price to jump even higher.

When that happens, inevitably some politicians call for investigations of collusion or market manipulation, but the many price spikes and investigations since 1996 have found no evidence of illegal activity. Instead of feel-good legislative inquiries and unproven accusations, we need to understand the real cost of these price spikes and what might be done to reduce them.

In reality, gasoline price spikes impose a relatively small cost on Californians.

The October 2012 spike was the largest of the dozen or so since 1996. It lasted about a month and raised gas prices by about 25 cents a gallon on average during that time. California individuals and companies together use about 40 million gallons a day, or about 1 gallon per person per day. So this price spike cost consumers about $7.50 each, or $30 for a family of four.

That’s not nothing, but it doesn’t put it among the most pressing cost issues for living and doing business in the state.

The spikes are triggered by real shortages when the supply of CARB gas is disrupted, but they may be exacerbated by some producers that withhold product to drive prices up further. Either way, Steve Stoft and I proposed a policy in a 1999 op-ed (and a recent blog post ) that would curb the spikes while maintaining the clean air benefits: an automatic waiver policy that allows any company to bring in conventional gasoline if it pays a surcharge of, say, 25 cents a gallon.

The surcharge would be substantially larger than the normal production cost differential so that in normal times, no firm would want to do it. But when a supply disruption occurred, and California wholesale prices shot up more than 25 cents, some marketers would bring in non-CARB gas and pay the surcharge. This would cap the spike at about 25 cents a gallon and undermine incentives to withhold available CARB supply.

During a disruption, even a small supply of non-CARB gas would rein in prices, so the overall impact on pollution would be small. The waiver fees could be used to more than offset that small increase.

A good place to start would be buying back more of the pre-1976 cars that in California are exempt from emissions checks and are massive polluters. That would make the policy a win-win.

William R. Klesse

California has many advantages: great weather, great people. But it does not have policies that support heavy manufacturing. High costs and regulations have forced out most manufacturing industries, and Californians have lost the tax base, high-paying jobs and real value-added economic activity that those industries provided.

The regulatory environment in California is not constructive to the economy. It is not constructive to working people and it is not constructive to companies like Valero, which offer people excellent jobs and the ability to own their own homes, provide for their families and retire with benefits.

I do not know a single person who does not want clean air or water, or who does not worry about the world and the climate for their children and grandchildren. But people also want a strong economy, a strong manufacturing base, and reasonable prices for energy, food, rent and taxes.

At their heart, many of California’s policies are designed to eliminate fossil fuels like oil. These fossil fuels remain more economic than alternatives, and give our nation a competitive edge in the world economy. In fact, the U.S. is having a tremendous oil and gas boom, which is dropping prices for everyone and generating tremendous manufacturing opportunities.

While the rest of the country is enjoying these benefits, California’s economy remains weak. Small special interest groups and academics have hijacked your regulatory policies, and they don’t tell you the facts regarding those policies’ impacts. They posture the policies to sound like you can have everything without a cost. Here are the facts:

California mandates a unique blend of gasoline.

State regulations make it expensive to move fuel.

New rules are going to raise your energy prices relative to other parts of the country.

The new rules will have no impact on climate change.

In 2010, Valero supported Proposition 23, which would have postponed AB 32 and its mandate to reduce greenhouse gas emissions to 1990 levels by 2020. I was criticized for this, but our point was: Your prices are going to go up, even under normal circumstances. During a supply shortage like the one that occurred in October, prices will skyrocket even more.

Studies predict that under AB 32, electricity costs will double, and seven California refineries could shut down. Supplies will tighten and prices will shoot up, just like in October — except it will be permanent, instead of a temporary disruption.

It doesn’t have to be this way. California’s problems are self-inflicted, and they can be fixed. The special interest groups that are influencing policy do not care about the working person — their agenda is to eliminate oil at any price. Unless you grab hold of this process, other manufacturers will leave your state, and prices will continue to go up.

Bill Lockyer

During most of the eight years I served as California attorney general (Jan. 1999-Jan. 2007), my office hunted for unlawful market conduct by oil companies. We didn’t find any evidence. What we did find was this: California’s oil and gasoline market puts the companies in a great position to gouge consumers without breaking a single law.

Competition — one of consumers’ best friends — is a scarce commodity. Since 1980, the number of oil refining companies operating in the state has dwindled to 14 from 35, a 60% drop. In 1980, the largest six refiners controlled 68% of refining capacity. Now, the top seven companies control 93% of production.

Supply is tight and declining.

In 1982, the state had 43 operating refineries. Today, it has 18 — 58% fewer. Over the same period, refining capacity has fallen by 23%, or nearly 580,000 barrels a day. Meanwhile, demand has remained fairly consistent. In 2010, retail consumption totaled 14.9 billion gallons, roughly the same level as in 2003.

These market conditions have increased California’s reliance on imported crude oil.

In 1982, 6% of the state’s oil came from foreign imports. In 2011, that number was 50%. That makes the state susceptible to global events that affect supply and prices. It would help if we could import refined gasoline from other parts of the country. But California’s gasoline formula requirements and isolation from pipeline infrastructure make that tough to do.

All these factors combine to make California drivers extremely vulnerable to the slightest supply disruptions. And Big Oil has not been shy about exploiting every opportunity to run up gasoline prices and, in the process, inflict financial hardship on consumers.

California could take many steps to better protect drivers from gasoline price spikes. Two important ones:

First, the state attorney general should vigorously enforce antitrust laws. When I served in the office, we won asset divestiture and other remedies in major oil company merger cases, and successfully fought the closure of Shell’s Bakersfield refinery. These actions lessened harmful anti-competitive effects and protected drivers from paying even higher prices. Fortunately, both of my successors have maintained strong antitrust enforcement programs.

Second, we need to reduce gasoline consumption. This can and should be accomplished in a variety of ways — increased fuel efficiency, expanded use of electric vehicles, smarter land use planning and more public transit. California has helped lead the way in implementing all these policies, but we can do more. We must do more if we want to protect our families’ pocketbooks from the periodic siphoning they suffer at the gasoline pump.

Simon Mui

When retail gasoline prices surged by 50 cents per gallon in early October, the immediate cause was an outage at ExxonMobil’s Torrance refinery. This closely followed an August explosion at Chevron’s Richmond refinery that sent thousands of residents streaming into hospitals and clinics.

More broadly, the culprit was our over-dependence on oil, which makes us vulnerable to jumps in global crude oil prices and breakdowns in an aging supply system. The lasting solution will be to reduce our crippling dependency and to create more fuel choices.

Our state’s clean energy law, AB 32, is reducing our dependence through the clean cars program that will double how far cars can go on a gallon of gasoline by 2025. It’s also expanding supplies of clean fuels through the groundbreaking clean fuels standard, helping ensure real competition in the fuels market.

These programs are clearing the way for innovative companies to create good jobs in California by producing advanced renewable fuels, biogas, cleaner electricity and plug-in electric cars.

The lesson is clear. As long as the oil industry refuses to offer us alternatives to gasoline and diesel, we will remain subject to the profit-taking whims of oil companies, global price spikes and refinery outages.

In fact, California has experienced 32 gasoline price spikes since 2006. Jumps in global crude oil prices were responsible 64% of the time. Of the rest, refinery accidents and equipment failures accounted for 20%, planned refinery shut-downs for maintenance 6%; and seasonal and holiday driving demand 10% of the time.

But the finger-pointing from the oil companies has been swift and predictable. Surely, the state’s clean air laws are to blame, they say.

Feel as if you’ve seen this movie before?

Californians shouldn’t be fooled by industry-backed groups that pretend to have consumers’ interests at heart. The latest incarnation is the Chevron-funded lobbying group Fueling California that, together with the Western States Petroleum Assn., is now spending big bucks scapegoating our clean energy law.

Instead of hiring lawyers and lobbyists to fight climate science and the very solutions that will provide consumers relief at the pump, oil companies would make us all better off if they instead invested more of their record profits to make their systems safe and reliable, and commercialize new, cleaner fuel sources that won’t run out.

We need California’s clean energy law and other programs to start phasing in more fuel choices and phasing out our oil dependency. Thanks to smart policies like these, we’ll be less vulnerable to future price spikes, helping California move forward. Let’s make sure the oil industry doesn’t turn us around.

Mary D. Nichols

The solution to protecting the consumer from high gasoline prices in California is not more gasoline. The solution is providing consumers with alternatives to gasoline.

California’s almost total dependence on gasoline leaves consumers powerless in the face of unpredictable global markets and wild price swings at the pump. Our current addiction to petroleum also carries high costs in terms of our air quality, public health and energy and economic security.

That’s why California is addressing our petroleum dependence head-on with a range of policies designed to support the development of alternative fuels, while offering consumers a range of transportation choices beyond gasoline and the internal-combustion-powered car.

My board recently adopted a package of Advanced Clean Car regulations that over the next 13 years will dramatically lower smog-forming emissions from the tailpipe, slash greenhouse gas emissions and increase the overall efficiency of all cars on the road. The regulations will save California drivers $5 billion in operating costs in 2025 and $10 billion by 2030 when more advanced cars are on the road.

To help consumers and support the manufacture of those advanced cars California is currently offering rebates toward their purchase. So far, more than 10,000 people have taken advantage of them. The result? Although California has only 10% of all the cars in the country, it accounts for 40% of the sales of the new plug-in electric cars.

We know that the transition to cleaner cars will not happen overnight. Liquid fuels like gasoline will be with us for quite a while. Our Low Carbon Fuel Standard recognizes that reality and is expressly designed to reward fuels with less overall carbon than gasoline.

In effect for two years now, the Low Carbon Fuel Standard is already promoting cleaner domestic transportation fuels for California. It also supports billions of dollars of investment in the research and production of the next generation of fuels, including “drop-in” fuels from algae, and ethanol produced from abundant sources of agricultural waste or even wood.

Moving away from gasoline also means offering Californians choices beyond the car. SB 375, our nation-leading program to promote improved planning for our cities, will put jobs closer to homes, and homes closer to public transit. It will revitalize our urban centers and our communities by making it easier, and safer, to bike and walk.

Changing the habits of a lifetime isn’t easy, but small changes add up and the options that are now emerging from California’s policies are beginning to make a difference. This may be why we are hearing calls to “protect the consumer” from those whose goal is to keep us continually dependent on their product.

In fact, more transportation choices for consumers and cleaner fuels will help stabilize the costs of our fuels, generate new jobs and businesses, and clean our air. Reducing our dependence on petroleum has been state policy for decades. Taken together, our collective vehicle and fuel policies are certain to reduce transportation costs for consumers. It’s clear we need to stay the course.

Robert B. Weisenmiller

California will always be at risk of gasoline price spikes caused by disruptions at refineries because it is a “fuel island,” stranded by time and distance from quick delivery of gasoline from outside the state. Without interstate pipelines, California relies primarily on maritime tankers for oil and gasoline imports, which cannot move fast enough to make up for a sudden drop in supply.

Spikes in California gasoline prices experienced in 2012 were in large part due to significant, unplanned outages at three major oil refineries. When the most recent outage occurred, in Torrance on October 1, the wholesale price for gasoline followed a pattern typical of such price spikes – rising, peaking and starting to decline within a week, fewer days than it would take a gasoline shipment to arrive at a California port.

Although the state’s clean-air requirements add to the price of gasoline, the health benefits are substantial, and studies show their value exceeds the additional cost at the pump. Furthermore, the requirements are not the primary driver of price spikes, nor do they prohibit importing gasoline from elsewhere.

In fact, refiners outside California can, and sometimes do, make gasoline that meets the state’s specifications. That said, in the wake of the recent price spike, the state eased summer-blend fuel requirements, which benefited motorists by allowing in-state refiners to immediately boost gasoline production by 3% to 5%.

But there is a larger lesson here: It’s time to think beyond the gas tank.

Instead of running on fossil fuels and driving toward empty, California needs to diversify its array of transportation fuels to include more electricity, biofuels, natural gas, propane and hydrogen.

The California Energy Commission is working to do just that as it helps the state meet ambitious climate change goals. The commission supports the development and use of new vehicle technology and alternative and renewable fuels through competitive awards of AB 118 funds — made available through legislation adopted in 2007 and funded by a small surcharge on vehicle and boat registrations and smog-check and license plate fees.

The commission has awarded more than $250 million to more than 120 clean transportation projects across the state. These awards have leveraged more than $500 million in private and public investment.

These investments support a wide range of projects, including the installation of about 6,000 electric vehicle charging stations and the rollout of hundreds of alternative fuel vehicles on the road. These investments also support the innovative development of biofuels made from algae and restaurant and agricultural waste.

The efforts are already paying off: They are reducing gasoline dependency, creating more than 5,000 long-term jobs, bolstering energy security and economic competitiveness, and reducing the risk of lung cancer and asthma for all Californians by cleaning up the air.

In the longer term, these crucial investments will lead to more options for consumers and smooth out the road to a clean transportation future for California.