Report: Motorists Overpaying Billions Due To Refiner Supply Manipulation

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Moving To One Grade Of Gasoline Could Protect California Motorists

Santa Monica, CA — As motorists take to the roads this labor day, a new report by the Foundation for Taxpayer and Consumer Rights (FTCR) has found California drivers are overpaying billions annually for their gasoline and there is a simple solution to the problem.

The report written by petroleum expert Tim Hamilton for FTCR details how West Coast gasoline refiners have manipulated supplies to keep gasoline prices artificially high and recommends going to one grade of gasoline to protect against such manipulation in the future. “The Solutions Needed To Keep Pump Prices Under $2 ” can be read by clicking here.

“If the state fails to act on these findings, price spikes will become a way of life in California,” said Hamilton.

“The cheapest and easiest way for taxpayers to create a strategic reserve in order to avoid price spikes is to use existing pump capacity,” said Jamie Court, executive director of the Santa Monica-based Foundation for Taxpayer and Consumer Rights. “Rather than drill in the Arctic, let’s clean the pumps of the 50% of higher-octane fuel that is not used.”

The review of industry data, depositions and internal memos of oil company executives produced in litigation, trade journal reports, and other publicly available information found, among other things:

– The majority of the higher gasoline prices in the West (adjusted
for differences in state/local taxes) compared to the rest of the nation are attributable to inflated refiner profit margin;

– By monitoring the crude sales and published reports of the volume of crude going into each refinery, oil companies can gauge the current level of production. Since they share common storage tanks and pipeline schedules, each in refiner can quickly determine the movement of gasoline, level of importing or exporting, and existing inventory levels;

– Existing antitrust laws do not adequately address an oligopolistic
market or the measures currently utilized by oil companies in the West to create spikes or maintain high price differentials;

– California consumers overpaid approximately $2.3 billion extra at the pump last year. This excess revenue for oil companies generally flows out of state to the tune of nearly $7 billion each year;

– The three octane grade gasoline offering of regular, midgrade, and premium results in under-utilization of the existing tanks, many of which sit partially filled with slower selling high octane gasolines. All of the small percentage of vehicles actually requiring higher octane fuel could easily receive the octane-boost by pouring a small bottle of additive in the vehicle tank every other fill-up.

– If state governments do not adopt new legislative initiatives, the
federal mandate to use ethanol as a replacement for MTBE will result in consumers in the West (and other regions of the country utilizing cleaner-burning reformulated fuel blends) being further plagued by unnecessary and regularly occurring price spikes and even greater differentials;

– Using a review of published truck loading terminal capacities for
Phillips (76) in California resulted in FTCR estimating approximately 32% or 14.4 million barrels of the state’s bulk storage is dedicated to higher octane formulas. Due to the lower volume of the high octanes, FTCR further estimates approximately 50% of the storage dedicated to higher octane gas is never utilized effectively.

– The estimated increased utilization of existing tanks at bulk storage and the service station levels that should accompany a legislative mandate of a single grade of gasoline would equate to the equivalent of constructing 9.5 million barrels of new storage capacity. Adoption of the FTCR single grade strategy would free up nearly four times the storage recommended by Stillwater for a strategic reserve.

– The extra costs of blending midgrade and premium is typically estimated in the range of just over a penny per octane point. When refiners sell gasoline by the barge to each other on the West coast spot market the differential between 87 octane and 92 octane premium hovers around 5¢ per gallon. Using California as an example, the average pump price of midgrade in 2001 was 10.4¢ over regular and the premium averaged 20.4¢ higher. The industry motivation for selling the higher octane gasoline is the higher
margins of profit in premium versus regular;

– Approximately 95-97% of the vehicle fleet will operate correctly on a single lower octane gasoline if blended with the appropriate detergents. Adoption of a single grade requirement could save California consumers approximately $450 million from octane over-purchasing alone.

FTCR’s report recommends:

– replacing the three octane gasoline format (regular, midgrade, premium) with a single grade gasoline requirement (87 or 88) to increase storage capacities by increasing utilization of existing storage at refineries, pipelines, truck loading terminals, and service stations;

– utilizing freed existing bulk storage formerly holding midgrade and premium as a publicly operated strategic reserve for gasoline components and ethanol; and

– utilizing the purchase power of state and local government to enter into contracts with outside refineries for regular supply to the strategic reserve as a means of increasing inventories and removing competitive insulation of the local refiners.

The Foundation for Taxpayer and Consumer Rights is a non-profit,
non-partisan consumer watchdog group based in Santa Monica.

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Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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