Despite Falling Oil Cost, California Gas Prices Soar In Refinery Fire’s Wake

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Gas prices in California are soaring a week after a fire damaged the Chevron refinery in Richmond, a critical piece of the state's supply chain.

Prices at the pump jumped 25.8 cents in the Sacramento area over the past week, to $4 a gallon, according to market tracker In San Francisco, motorists are paying $4.17 a gallon, according to a separate survey by AAA.

And it may be only the beginning.

"You probably won't see a break until mid- to late September," said Patrick DeHaan, senior petroleum analyst for GasBuddy.

The increase comes even as crude oil prices on the futures market have drifted lower. So is there really a sudden shortage of gasoline in California, or is somebody making money off the refinery mishap?

The price spike, analysts say, boils down to basic supply and demand. And in California, any dip in supply sends shock waves through the retail gas industry.

Part of the reason is that California is removed from the core of the nation's refinery market, from the Gulf of Mexico north to the Great Lakes. Consequently, California relies heavily on West Coast refineries.

Whether those refineries fiddle with supply to keep prices high is a matter of intense speculation.

"We are hostages to our own refineries," said Liza Tucker with Consumer Watchdog. "And the oil industry consistently manipulates gasoline supplies on hand to keep prices higher."

The state's supply web was threatened again Monday when a fire broke out at the Shell refinery in Martinez. Shell said flames were extinguished within 10 minutes, and nobody was injured. The oil company declined to comment on whether the fire would crimp production.

The 110-year-old Chevron refinery has a production capacity of about 245,000 barrels a day, and typically supplies about 15 percent of California's gasoline. It produces gas primarily for Chevron outlets. But like other refineries, it will sell to others once it has met its primary obligation.

GasBuddy's DeHaan said he's concerned that Chevron might opt to take months to repair the damaged Richmond refinery, which would continue to limit gas supplies and keep pump prices high.

Chevron and the rest of the oil industry deny suggestions that they would intentionally try to profit by keeping production low.

Chevron spokeswoman Melissa Ritchie said other unaffected units of the Richmond refinery "are making transportation fuels, but at a reduced capacity. We are cooperating fully with regulatory officials to investigate the incident and do not know how long this unit will be down."

Chevron declined to disclose the refinery's current production output.

"I can definitely say that we want to fix that unit as soon as we can," Ritchie said. "We're not going to put that on hold. We're cooperating with investigators, and we will act as soon as it's safe to get in there."

Gas station operators stressed that they're not the ones making money off any shortage.

"That's a joke, and we have to deal with that every time the price goes up," said one downtown Sacramento gas station operator, who did not want to be named because he does business with Chevron. "We actually make less money when the price goes up.   We only make pennies on the gallon as it is."

Department of Energy and petroleum industry officials say a gas station operator makes, on average, about 2 percent for each gallon sold. During the gas price spikes in the summer of 2008, Sacramento-area service station operators said they were making about 5 cents a gallon.

Most gas stations are tied to a major oil company's brand, which means they can't shop around and are heavily dependent on what oil companies charge each station. Wholesale gas prices in California jumped by 25 percent immediately after the Chevron refinery fire.

Other factors besides simple supply and demand combine to make California's gas prices among the highest in the nation. The state charges relatively high gasoline taxes and fees – more than 65 cents a gallon, including 36 cents in state excise tax.

Also, California has standards for gasoline that are stricter than federal clean-gas mandates, which translates to a higher production cost.

Coupled with a steady price increase in the weeks before the refinery fire, GasBuddy said, Sacramento-area gas prices are now 41.6 cents a gallon higher than they were just one month ago. The average gasoline cost is 32.9 cents higher than a year ago.

In contrast, the average price of gasoline nationwide increased 5.4 cents per gallon over the past week to $3.67. That's 24.8 cents higher than last month and 5.7 cents above last year.

There is some good news on the horizon: Refineries will switch over to cheaper "winter blend" gasoline, and gas demand historically drops after Labor Day, when the summer driving season winds down. Decreased demand typically sends gas prices lower.

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