California refinery woes fueled post-Katrina spike in gas prices

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Sacramento Bee (California)

This summer’s unprecedented run-up in gas prices occurred as California spot prices surged in tune with wholesale prices on the New York Mercantile Exchange in the wake of Hurricane Katrina, according to a report issued Friday by the California Energy Commission.

The spike was exacerbated by production problems at California refineries, including disruptions caused by a September power outage in Los Angeles, and a jump in fuel exports to Arizona and Nevada after Katrina.

The report said overall crude prices did not contribute significantly to the state’s retail gas price increase.

One consumer group criticized the commission’s report, saying it failed to address the record profits generated by giant oil companies.

“It ignored the root causes and instead goes for very superficial explanations that do not challenge the oil industry,” said Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “The oil industry intentionally reduced supply in California and around the country.”

Heller cited the commission’s findings that reported pipeline exports from California to Arizona and Nevada rose 45 percent during the four weeks after Katrina.

Commission Chairman Joseph Desmond said the panel wants to study the issue and also is calling for an analysis of the state’s gas price ties with the NYMEX market.

All told, California motorists saw prices at the pump shoot up 29 cents a gallon in one week in late August.

It was a remarkable run-up in which the average gas price climbed 32 percent to a record $3.06 on Sept. 5 from $2.33 a gallon on June 13. This week, the price has fallen to $2.58 as motorist demand slowed and refiners boosted supply, according to AAA.

This summer also saw California break a historical trend. For the first time in four years, the average gas price in the United States was higher than in California.

“There were many factors that affected California,” Desmond said. “The evidence clearly shows this is a very liquid market that responds very quickly to the change in the supply. The market responds by price to the rationing of the commodity.”

The price spikes and fuel shortage could have been worse.

Moves by state, federal and international agencies to increase supplies — including tapping into national reserves and an early switch to special blended winter gasoline — eased the market pinch, the commission said in the report, “Gasoline Price Movements in California.”

Desmond said the findings underscore the price volatility in the state’s gasoline market.

The state competes globally for about 8 percent of its gasoline. Katrina, which knocked out 26 percent of the nation’s crude production, sparked an oil bidding war.

While California imports about 58 percent of its crude oil supply from Alaska and foreign sources, the state was affected most by the competitive forces on the New York commodities market. California spot prices are influenced by NYMEX wholesale prices.

“It was the market forces. As a free market, individuals are free to buy and sell as they see fit,” said Chris Mennis, an independent oil trader in Aptos.

“The speculators are short (selling) right now. We’re having a terrific drop (in prices),” he said. Mennis said prices could fall to $ 2 to $ 2.25 before climbing again, especially if demand spikes up and a cold snap envelops the country.
The Bee’s Gilbert Chan can be reached at (916) 321-1045 or [email protected]

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