Oakland Tribune

SAN MATEO, CA — When Anne Siglin moved to Alameda from Chicago in 2005, she was shocked by the price of gas in the Bay Area.

“There are refineries right here,” Siglin said. “Why does gas cost so much more?”

As gas prices continue to soar and Californians are paying a whopping 60 cents more for a gallon of unleaded than the national average, many Bay Area residents are wondering the same thing.

The cost of gas in California — which on Tuesday averaged $3.19 per gallon statewide, compared with $2.59 nationally — has been higher than in other states for at least five years. Worse yet, it’s even more expensive in the Bay Area. Gas prices tied a record high Friday in the San Francisco metro area, which includes San Mateo County. The average price there for a gallon of unleaded gas reached $3.36, according to AAA.

It’s not much better in the East Bay ($3.26) or the San Jose area ($3.24).

What’s the explanation?

Consumer advocates, oil associations and academics agree the problem is supply and demand. California’s refineries are stretched to capacity, so any additional stress on the system drives supply down, and hence, prices go up.

But consumer watchdogs — and many individuals — say the oil companies manipulate supplies to make them run low and use refinery downtime as an excuse to jack prices up unduly high. Not surprisingly, oil industry representatives disagree.

Though experts agree that supply and demand is the primary issue, other factors enter in as well, from the state’s cleaner-burning gasoline to refiners’ rising margins.

“We use a cleaner-burning gasoline and that accounts for about an extra 10 cents per gallon for production,” said Severin Borenstein, director of the University of California Energy Institute, based at UC Berkeley.

California’s special blend, with its reduced levels of smog-producing ingredients such as aromatic hydrocarbons, is mandated by California’s Air Resources Board.

The extra 10 cents from the special blend accounted for all the difference between 1995 and 2000, but it doesn’t account for all the difference now, Borenstein said.

Because California refineries don’t make enough gas to answer the demand, the state must import gas from the few refineries — two on the Gulf Coast and a few overseas — that can make the special blend.

“The cost of importing gasoline adds 10 to 15 cents a gallon to the price,” Borenstein said. “It also makes gas prices in California more volatile,” because instead of a steady stream of gas arriving via a pipeline, some days a lot of gas arrives and some days none arrives at all, he said.

California’s higher gas taxes add another approximately 13 cents per gallon, according to the American Petroleum Institute.

If cleaner-burning fuel adds 10 cents, shipping costs 10 to 15 cents and taxes 13 cents, that accounts for 33 to 38 cents — and Borenstein says on average over the last five or six years, California gas has cost 20 to 25 cents more than the rest of the nation.

But right now gas is 60 cents more than the rest of the country.

Where does the extra 22 to 27 cents come from?

All about profit

“Profit,” Borenstein said. “Sometimes (oil companies) make a lot of money because the market is really tight and demand pushes up the price.”

California Energy Commission data show that the average price for a branded gallon of unleaded was $3.08 on March 19, with a crude oil cost of $1.32 a gallon.

The refineries’ margins that day — their profits plus the cost of making the gas — were $1.12 a gallon.

Compare that to March 20, 2006, when commission data show branded gas retailed for $2.64 a gallon, with a crude oil cost of $1.39 and the refineries’ margins were 66 cents.

Meanwhile, oil companies have posted record profits and crude oil prices have been rising again, surging Thursday to a six-month high of more than $66 a barrel.

The current 60-cent difference between gas in California and the rest of the country is one of the biggest margins in recent memory, said Sean Comey of AAA of Northern California. AAA tracks gasoline prices daily.

In Comey’s opinion, commodity trading is another factor driving prices up.

“One of the elements of this story that people haven’t heard before is the role of financial speculation in boosting oil and therefore gas prices,” Comey said. “We’ve really seen an explosion in terms of the number of times oil gets traded as a commodity between when it’s produced and when it’s turned into gasoline.”

Daily global demand for crude oil is about 85 million barrels per day, Comey said, and there have been days recently when one and a half billion barrels have been traded.

“Every time it changes hands someone makes money off it,” Comey said. “As they keep buying and selling something before they use it, this tends to boost the price, and that price flows downstream to your local gas pump.

“(Trading) is an absolute huge factor, one of the biggest factors in why gasoline prices have gotten up so high to date,” agreed Stephen Schork, author of The Schork Report, a research and trading report. “There has been an explosion in the amount of speculators trading in this market.”

Schork said traders are competing to buy and “that in itself is going to make prices go up because so many people are buying.”

On a positive note, Schork said he thinks a correction is due, and prices will go down in the coming months.

But for yet another view, Borenstein, of the UC Energy Institute, sharply disagrees with Comey and Schork’s assessment of the effect of trading on gas prices.

“It’s nonsense that trading adds to the price of gas,” he said. “Traders could try to buy up a lot of gasoline and hope the price goes up, but when they tried to sell it, they’d be pushing the price back down. There’s no empirical evidence that traders raise the price of gasoline.”

Refinery disruptions

A final factor: Some of the current difference may be because of an unusual number of recent refinery disruptions.

Each disruption further restricts the supply of available gasoline, helping keep prices high.

ExxonMobil Corp.’s refinery in Torrance, for instance, has been running below maximum capacity since February for maintenance.

Then, on March 22, a unit shut down after a malfunction, a problem that will take a week or two to resolve.

Other California refineries have had problems recently, with a fire in San Ramon-based Chevron Corp.’s Richmond refinery in January.

Also, the refineries are switching from the winter blend of gas to the cleaner-burning summer blend.

This disrupts supply because refineries let their supplies of the winter blend of fuel decline in anticipation of replacing them with the summer blend.

But the recent disruptions and seasonal downtime still don’t explain the longstanding gap between prices in California and the rest of the nation.

Asked about the gap, “We have a very serious supply-and-demand situation in California,” said Tupper Hull of the Western States Petroleum Association.

Refineries produce about 1 billion gallons a month, but the state typically consumes about 1.2 billion gallons a month, said Jay McKeeman, vice president of government relations for the California Independent Oil Marketers Association.

But consumer advocates and others say this isn’t the only reason for high prices.

AAA‘s Comey said the two biggest factors affecting prices now are refinery problems and the increase in the price of crude oil, but “robust profits” also figure in.

“The energy companies like to point to supply and demand, and while these are legitimate forces, they only tell part of the story,” Comey said. “Nobody likes to talk about their large profits and how that impacts what we pay.”

Drivers, too, are feeling the pinch — and some blame the oil companies.

“Oil companies manipulate the price of oil so their profit and their stock will go up,” said Fred Eisd of San Ramon, who drives daily to Oakland.

Consumer advocates agree.

“There’s no reason gas should be $3.40 a gallon when we were paying $2.40 a gallon in October, other than the fact that the oil companies can do it,” said Jamie Court, president of California-based consumer advocacy group the Foundation for Taxpayer and Consumer Rights. “The price of producing the gas hasn’t gone up since then. The cost of crude oil hasn’t changed appreciably.”

ExxonMobil, the world’s biggest publicly traded oil company, reported that profit rose 9 percent in 2006 to $39.5 billion, the largest annual profit by a U.S. corporation.

Meanwhile, Chevron reported its best-ever annual profit in 2006, $17.1 billion, up 22 percent from 2005.

“We all agree it’s supply and demand, but we believe they (oil companies) are rigging their supply so that prices go through the roof,” Court said. “In the fall leading up to the November election, oil companies flooded the market with gas. But when they want to make profits, they can pull back on production and achieve a far higher price than their production costs.”

Oil industry representative Hull, of the petroleum association, said Court is wrong.

Multiple investigations

“There have been dozens and dozens of investigations of the oil industry over the last 20 years from everyone from the California Attorney General to the U.S. Department of Justice and the California Energy Commission into the question of whether any market manipulation is occurring.

Each has found no illegal or improper conduct on the part of the industry,” Hull said.

It’s correct that no state or federal investigations have shown that oil companies have engaged in illegal market manipulation. But Court isn’t saying that the oil companies are engaging in illegal behavior: “They create scarcity and it’s legal,” he said.

Hull rebuts this argument, as well.

“It is untrue that the supply is contracted in order to bring the price up,” Hull said.

“The simple facts are that the demand for transportation fuel has gone up 50 percent in the past 20 years and the number of refineries making it has gone down by more than half,” Hull said, citing California Energy Commission numbers.

According to the commission, 10 refineries closed between 1985 and 1995, leaving California with its current total of 21 refineries.

But Susanne Garfield, spokeswoman for the California Energy Commission, paints a different picture.

In reality, Garfield said, a number of smaller refineries merged to make larger refineries. “We haven’t lost much capacity,” Garfield said. “Twenty years ago refiners were not producing as much as they could produce.”

Garfield said the real solution calls for less reliance on conventional fuels.

“We have a huge market and a huge demand, and our governor and the commission are working to move our dependency off fossil fuels,” she said. “We’re looking at more alternative gas vehicles, more hybrids and electric cars, natural gas, ethanol, fuel cell vehicles. We’re trying to move our dependence from petroleum to alternatives.”

Legislative proposals

Consumer advocate Court focused on legislative solutions.

“California needs to regulate supply and force oil companies to run their refineries full speed and sustain adequate levels of inventory,” Court said. “Either the Legislature has to pass such a law or the people have to enact it at the ballot box.”

Still, Court, whose organization just launched OilWatchdog.org, a Web site and blog on the oil industry, doesn’t hold much hope such measures will come to pass.

“The Legislature is too deep in the pocket of big oil,” he said. “Even those who don’t take campaign contributions from them are afraid to buck them. The real scarcity is political courage.”
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Contact Janis Mara at [email protected] or (510) 208-6468. Read her Energy Blog at InsideBayArea.com