Why California Drivers Pay More For Gasoline

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California appears poised to win a dubious distinction – becoming the first state this year to pay an average of $4 for a gallon of regular gas.

California's average gas price jumped 50 cents in the last month to hit $3.91 on Tuesday, according to an update from AAA of Northern California. That tops even Hawaii, which usually has America's priciest gas. The Aloha State currently pays $3.90 for regular.

San Francisco's average price has reached $3.96, and at the current rate of increase will probably reach $4 late this week. Eureka is already there, paying an average of $4.06 for regular, according to AAA.

Make no mistake – gasoline prices are soaring worldwide. The wave of unrest that has swept through the Middle East and triggered open warfare in Libya has pushed the price of crude oil back above $100 per barrel for the first time since the financial meltdown of 2008. Gas prices are following suit, and they probably aren't done.

"They're likely to keep rippling up," said Brian Milne, refined fuels editor for the Telvent DTN business information service. "The (oil) cost increases still need to work their way through the supply chain."

But the pain at the pump is particularly acute in California. The Golden State typically endures the highest gas prices in the continental United States, about 25 to 30 cents higher than the national average. The difference is even bigger now – 39 cents.

Californians pay more – both in good economic times and bad – for reasons that involve taxation and air pollution.

The state often has the nation's highest taxes on gasoline. Californians currently pay 66 cents in state and federal taxes on every gallon of gasoline. The national average is 48 cents, according to data from the American Petroleum Institute, an oil industry lobbying group.

And because sales taxes are calculated as a percentage of the overall price, they rise whenever the price does. That's good for the cash-strapped state government, bad for drivers.

In addition, California's gasoline is unique.

The state in 1996 switched to using a set of gasoline blends designed to fight air pollution in California's smog-choked cities. The switch worked, but at a price.

During the 1980s and early 1990s, the state's oil refineries had been dealing with low profit margins, and some had closed. The switch to new gasoline blends required refiners to upgrade their equipment, at a cost that could reach $400 million per refinery. Some shut down, rather than pay for the upgrades.

The new blends cost an estimated 5 to 15 cents more to make per gallon than standard-issue, regular gas. Plus, California became dependent on a limited number of refineries, and those refineries reaped higher profit margins than similar facilities elsewhere in the United States.

"It's a stranded market, and it's much easier to control prices in a stranded market," said Judy Dugan, research director of the Consumer Watchdog nonprofit group.

Oil industry representatives note that state officials have repeatedly investigated California's gasoline market without finding proof of price fixing.

"It's a complicated market, we have some unique characteristics, but they're characteristics of supply and demand," said Tupper Hull, spokesman for the Western States Petroleum Association, an industry lobbying group.

Those unique characteristics, however, don't explain why California's prices have risen faster than the rest of the nation's this year. The national average price for regular gas has gone up 40 cents in the last month, according to AAA.

Analysts say the difference is a matter of timing. Each January and February, California refineries go through a process called "turnaround," when they cut production, perform maintenance and switch to making a fuel blend used in warm-weather months. That blend costs a bit more than winter gas – about 5 to 7 cents more per gallon, by some estimates. Refineries in other states start turnaround later.

"The schedules vary, but usually California's a little bit earlier than the rest of the country," Milne said. "You're finishing up essentially, but you've been going through it for a while."

E-mail David R. Baker at [email protected].

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