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Facing $5 a Gallon Gas California Relaxes Pollution Rules

October 08, 2012

California Facing $5 Gasoline Prompts Brown to Relax Standards

California’s average price for regular unleaded has jumped almost 50 cents a gallon in the past week. Photographer: David Paul Morris/Bloomberg

Gasoline closing in on a record $5 a gallon prompted Governor Jerry Brown to direct California regulators to relax smog controls so oil refineries could increase supplies of cheaper fuel.

Regular gasoline in California surged to an average $4.668 a gallon, an all-time high and 22 percent more than the U.S. average, according to data today from AAA, the nation’s largest motoring organization. Some stations were charging as much as $5.89 in the Big Sur area, according to GasBuddy.com.

The California Air Resources Board yesterday granted refineries permission to make an early shift to winter-blend gasoline, typically not sold until after Oct. 31. Due to the composition of the gasoline, refiners can produce more of the winter blend than the summer blend.

“It’s absolutely outrageous,” said Tonnie Katz, 67, a retired newspaper editor who stopped at a Los Angeles gas station for a $69 fill-up. “I don’t think anyone understands it. For seniors, this is an awful big chunk out of our budgets.”

California’s average price for regular has jumped 50 cents a gallon in the past week. That made it at least $1 a gallon higher than in a dozen other states: Alabama, Arkansas, Georgia, Louisiana, Missouri, Mississippi, New Mexico, Oklahoma, South Carolina, Tennessee, Texas and Virginia, according to data provided by AAA.

FTC Investigation

U.S. Senator Dianne Feinstein, a Democrat from California, sent a letter to Jon Leibowitz, chairman of the Federal Trade Commission, yesterday asking for an immediate investigation into whether supply was being manipulated for profit.

“California commuters are facing the highest gas prices and the longest commutes in the country,” Feinstein said in a statement. “Paying hundreds of dollars to fill your tank every time you go to the pump is untenable, particularly because it does not appear the price spike and supply disruption are in any way related to supply and demand.”

California is dependent on its own refineries for gasoline because the state is mostly cut off from oil-products pipelines spanning the rest of the country. Refiners outside California are generally not equipped to supply the cleaner-burning gasoline required in the state.

Soaring Prices

Retail prices began to skyrocket after Exxon Mobil Corp. (XOM:US)’s 150,000-barrel-a-day refinery in Torrance, near Los Angeles, reduced production Oct. 1 after a power failure. That followed a fire that knocked out a crude-processing unit at Chevron Corp. (CVX:US)’s plant in Richmond, near San Francisco, in August and the shutdown of a Chevron pipeline that delivers crude to Northern California because of contamination.

“Gas prices in California have risen to their highest levels ever, with unacceptable cost impacts on consumers and small businesses,” Brown said yesterday in a statement. “I am directing the Air Resources Board to immediately take whatever steps are necessary to allow an early transition to winter-blend gasoline.”

The change may increase California’s fuel supply by 8 percent to 10 percent with only a “negligible” impact on air quality, Brown said.

Winter-grade gasoline is about 15 cents to 20 cents a gallon cheaper to blend and refiners can quickly and easily make the switch, Andy Lipow, president of Lipow Oil Associates LLC in Houston, said day by phone.

‘Immediate Reaction’

“It’s an easy change to make,” Lipow said. “I would expect you will get an immediate reaction at the pump.”

The last time the air board granted such a variance was in the wake of Hurricane Katrina in 2005. It was not for a shift in seasonal fuels, but to allow for an adjustment in the blend to make the fuel available more quickly.

“This is probably going to continue to recur because California has just enough refining capacity to supply its demand, but only if everything is running well,” said John R. Auers, senior vice president at Dallas-based Turner Mason & Co., which advises energy companies. The state’s refining industry “operates on a knife’s edge,” he said.

While the waiver and restored production may ease supply, prices may not immediately fall as refineries hold onto gasoline and wait until the highest price to sell, said Bob van der Valk, an independent fuel pricing analyst in Terry, Montana.

“The majors have product,” van der Valk said Oct. 5 by telephone. “But they’re not selling to fuel distributors, they’re not selling spot-market barrels, at any price.”

Running Out

Costco Wholesale Corp. (COST:US) ran out of gasoline at Southern California stations last week after searching in vain on the spot markets, Jeff Cole, the company’s vice president of gasoline, said by telephone Oct. 3.

“You can offer whatever you’d like, but nobody’s selling,” he said at the time. Issaquah, Washington-based Costco was “pulling fuel from all corners” to supply its customers in the Los Angeles area, he said.

At a Costco station in Marina Del Rey near Los Angeles, cones and shopping carts blocked access to the pumps. A security guard told motorists he didn’t know when the station might reopen. A sign on one of the cones noted that another Costco gas station, in Hawthorne to the south, remained open.

“I worry that another energy crisis might be coming,” said Bo Suh, 71, who had come to the station to fill up his Toyota 4-Runner. “After that, prices might go up.”

1973 Crisis

In the energy crisis of 1973, some gasoline stations ran out of fuel while customers waited in long lines at others. Gas was rationed through an odd-even system, allowing sales to drivers of vehicles ending in odd numbers only on odd-numbered days, and vice-versa.

Last week, Tesoro Corp. (TSO:US) stopped selling gasoline to Southern California customers without binding contracts, Megan Arredondo, a spokeswoman at the company’s headquarters in San Antonio, Texas, said by e-mail. The company, which was running its California refineries near Los Angeles and in Martinez at capacity, was working to bring in additional supplies, Arredondo said.

Valero Energy Corp. (VLO:US) similarly halted all so-called spot market sales to customers without contracts and was allocating deliveries to branded and unbranded customers, Bill Day, a spokesman at the company’s headquarters in San Antonio, said by e-mail Oct. 4. The company’s California refineries in Rodeo and Wilmington are operating at planned rates, he said.

“Product supply in California has tightened, especially in Southern California, due to refinery outages,” Day said. “Valero has taken steps to ensure that it will fulfill its commitments to branded and unbranded customers.”

Refinery Contracts

Branded gasoline stations have contracts with refiners to sell products that carry that company’s name, and to buy its gasoline formulated with special additives. While unbranded stations can still have contracts with the refiners, they don’t have an agreement to use the name or special fuels.

Exxon rationed fuel to all customers who take deliveries at U.S. West Coast terminals because of “production impacts” at the Torrance refinery, Rachael Moore, an Exxon spokeswoman in Fairfax, Virginia, said by e-mail Oct. 5.

Phillips 66 (PSX:US), based in Houston, delayed the maintenance shutdown of a unit known as a hydrocracker at its 139,000- barrel-a-day Los Angeles refinery for at least a week to cash in on record refinery margins in California, two people with knowledge of the schedule said Oct. 5. The six-week upkeep procedure is now scheduled to begin Oct. 16, said the people, who asked not to be identified because the information isn’t public.

Added Steps

“We have taken additional measures to ensure there are fuel supplies available for both branded and unbranded customers,” said Rich Johnson, a Phillips 66 spokesman.

Rack prices will start falling as refineries’ inventories pile up and they switch to winter-blend fuels, van der Valk said. Retail gasoline prices are not fixed to wholesale prices, so sellers can choose when to reflect a drop in their costs.

“The bottom line is we’re going to feel the squeeze for another 10 days,” van der Valk said.

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; Lynn Doan in San Francisco at ldoan6@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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