Oil Daily

Californian motorists are overpaying by billions of dollars annually in fuel prices at the pump because West Coast refiners manipulate supplies to keep the retail cost of gasoline artificially high, according to report released by a consumer watchdog group.

And the group recommends preventing such manipulation in the future by replacing the three octane gasoline format with a single grade requirement to increase storage capacities, and creating a strategic reserve for gasoline to offer protection from price spikes.

“If the state fails to act on these findings, price spikes will become a way of life in California,” said Tim Hamilton, author of the report, “The Solutions Needed to Keep Pump Prices Under $2,” written on behalf of the California-based Foundation for Taxpayer & Consumer Rights (FTCR).

Latest data from the US Energy Information Administration (EIA) show that Californians pay the highest average price for regular-grade gasoline, forking out $1.60 per gallon, about 21cents higher than the national average of $1.39/gallon.

Consumers in the West Coast region overall paid an average of $1.54/gallon last week, the EIA says.

Gasoline production in California is highly concentrated, with 13 refineries in the state that produce gasoline owned by eight companies. The top four plants are owned by just three firms responsible for 50% of gasoline production, according to consulting firm Stillwater Associates.

The oil industry has blamed higher gasoline prices in California on the introduction of unique cleaner fuel requirements — known as CARB gasoline after the California Air Resources Board — that raised production costs, as well as tight refining capacity in the state, refinery and pipeline outages, higher crude oil prices driven by Opec policy, and the difficulty in transporting fuel from other parts of the country because of inadequate infrastructure.

But the FTCR says that “the majority of the higher gasoline prices in the West compared to the rest of the nation are attributable to inflated refiner profit margin.”

Gasoline consumers in California paid approximately $2.3 billion extra at the pump in 2001, according to the report.

Recently released memos of oil company executives outline cooperative litigation and lobbying efforts intended to close down west coast refining capacity, short the west coast market of adequate inventories, and insert language into environmental regulations that, unbeknownst to policymakers, would insure smaller competitors went out of business, the report added.

But the American Petroleum Institute slammed the report’s insinuation that gasoline prices in California are artificially inflated by the oil industry, with its chief economist, John Felmy, saying that “this is a deeply flawed study, full of bad ideas and mistakes.”

He called the claim that consumers pay more than $2 billion more than they need to for gasoline because of oil industry manipulation “unbelievable.”

“This [report] is a challenge to an industry that works hard to keep the [gasoline] consumer well supplied,” he added.

According to Salomon Smith Barney analyst Paul Ting, refining margins in California have followed the trend in the rest of the country and have fallen well down from year-ago levels.

To-date third quarter refining margins in California are $4.94/per barrel, just over half the average for the third quarter last year of $8.64/bbl, Ting says.

To keep gasoline prices down, the FTCR suggests replacing the three octane gasoline system with a single requirement that would have the effect of creating the equivalent of constructing storage capacity of 9.5 million barrels, as it would increase the utilization of existing tanks at bulk storage and at service stations.

Under the current three-grade system, existing tanks are underutilized. Many tanks sit partially filled with slower selling high octane grades, the report claimed.

The FTCR report also called for the creation of a strategic reserve for gasoline that would be around 3 million barrels in size, offering approximately three days of supply.

However, the creation of a strategic reserve was a bad idea, as government inventories would have the effect of only discouraging the oil industry from building stocks, thus negating any net positive impact on available suppliers, according to Felmy.