Will California Catch Oil Industry Price-Fixing?

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Given stubborn premium, investigators may find market manipulation this time

California Attorney General Kamala Harris is investigating whether major oil refiners have artificially inflated retail gasoline prices in the state, the Wall Street Journal reports.

I know what you’re thinking: Doesn’t California investigate the oilies after just about every episode of high prices? And isn’t Harris seeking the U.S. Senate seat being vacated by Barbara Boxer, that serially fruitless investigator of oil companies from way back?

True on both counts. Yet there’s reason to put away the cynicism this time. Harris may be onto something.

Since March 2015, California drivers have paid a premium ranging from about 50 cents to $1 a gallon over the U.S. average. Remember, oil prices were falling all through 2015. Higher taxes and environmental regulations explain, at most, 25 cents of higher cost.

At first, this gouge gap owed to a genuine shortage after an explosion crippled a refinery in Torrance that produced 20 percent of Southern California’s entire supply. In a properly functioning, competitive market, you’d expect sky-high prices to attract imports from around the world in a matter of weeks.

Clearly, sufficient imports came. Nobody ran out of gas a year ago. Yet prices stayed stubbornly high.

Besides, the Torrance refinery has been back online since May. However, on July 4 the statewide average was 62 cents higher than the U.S. average, federal data show.

In February, I calculated that a persistent gouge gap could cost state consumers an extra $10 billion over a year. Now it seems I was too optimistic.

Of course, there’s nothing illegal, or even wrong, about a group of producers seizing upon a competitor’s woes to make lots of money.

Breaking the law, to oversimplify, generally requires companies to collude to pluck the consumer. Since the early 1900s, officials have mostly failed to prove such conspiracies in the oil industry.

“Over the past several decades, numerous investigations and expert market analysis have found no evidence of illegal activities or violation of antitrust laws,” said Catherine Reheis-Boyd, president of the Western States Petroleum Association, in a prepared statement.

“As they have done in the past, our member companies will cooperate fully with any federal or state inquiry,” she said. “I expect the conclusion will be consistent with past findings: Market factors are the primary driver of fuel costs in California.”

So let’s talk about market factors. Refining oil is typically a tough, low-margin business.

Back in the mid-2000s, a Wall Street analyst estimated that all refining profits in the U.S. had come from California — over the previous decade. Put another way, the industry lost money or broke even everywhere else.

There’s little doubt the industry has demonstrated market power, the ability to hold prices high for extended periods, inside the state.

The big question is why.

Sadly, the best answer in the past was; because California officials help them gouge consumers.

From 1992 to 2016, the state has mandated changes to our blend of gasoline at least seven times, the California Energy Commission reports. Each time our leaders switch blends, consumers are cut off from competing fuel from outside the state, allowing refiners to raise profits.

This matter of imports is far from trivial. Just four companies control 78 percent of refining capacity in the state.

Another possible answer is that California officials, for all their bluster, are just lousy antitrust enforcers.

I’m encouraged to see that California’s attorney general, who tends toward extreme self-promotion, isn’t grandstanding this time. Indeed, her spokeswoman declined to either confirm or deny that a probe exists.

Such laudable stealth sets her apart from, say, Bill Lockyer’s report on the industry in 1999 and his 2005 attempt to find profiteering after Hurricane Katrina. Not to mention Boxer’s 2009 call for then-A.G. Jerry Brown to dig into Shell’s decision to halt crude oil deliveries to a bankrupt refinery.

In May, Harris quietly sent subpoenas to in-state refiners asking for information about trading, maintenance and repair activities since 2014. Consumers can hope she is also posing questions about control of shipping terminals and key pipelines.

Early this year, Consumer Watchdog, a longtime industry critic based in Santa Monica, presented evidence that refiners were exporting big shipments of gasoline during the worst of the so-called shortage. Meanwhile Exxon, which then owned the damaged Torrance refinery, was importing almost no finished fuel, preferring to buy it from Chevron and others inside the state.

The group is asking the right questions. One problem is that data on production, imports and exports are closely guarded secrets that aren’t reported to state officials, let alone consumer groups.

“They know, and we don’t, how long their competitor’s refinery is going to be down,” said Jamie Court, president of Consumer Watchdog.

There’s yet another mystery: Major refiners appear to have sold wholesale fuel to their “branded” stations at sharply higher prices than they charged Costco and other independent retailers. The premium in 2015 went as high as 30 cents per gallon for weeks.

Court says this seems to be a new tactic by which oil companies drive up retail prices, noting that most of California’s gasoline is still sold at stations bearing major brands.

If state refiners have suddenly decided to overflex the market muscles they’ve been given by Sacramento policy, Harris stands a decent chance of finding out.

The industry seems concerned. Last year, the association hired none other than Bill Lockyer to advise it, although a WSPA spokesman said he’s “not under contract” at present. Lockyer is not exactly an antitrust expert, so it’s safe to assume his role was to prevent precisely the sort of investigation his successor is waging in secret.

In any case, Harris has a chance to make amends for signing off on Tesoro’s 2013 purchase of BP’s giant Carson refinery (and Arco stations), giving the company and Chevron control of half the state’s supply. (Disclosure: I supported the deal, too, because imports seemed robust at the time.)

When Exxon-Mobil’s Torrance unit caught fire, raising prices was child’s play.

Of course, the next question is what a state attorney general might do with hard evidence of price-fixing behavior. California’s history of regulatory interventions hasn’t been kind to consumers, to put it mildly. Remember the power crisis?

Still, that fear belongs in the future. For now, I’d settle for a narrower gouge gap.

[email protected]

(619) 293-1280

Twitter: @McSwainUT

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