Could California's gas spike spread?

Fragile refineries, cheap crude exports and commodities bets leave all US drivers vulnerable.

By Jason Notte Oct 8, 2012 2:22PM

ComstockCalifornia political leaders are scrambling to cap fuel prices, but there's little they can do to keep their state's problems at the pump from spreading.

Facing fuel shortages and fuel prices nearing $5 a gallon, ordinarily eco-conscious Gov. Jerry Brown directed the California Air Resources Board on Sunday to permit oil companies to start selling winter-blend gasoline. That fuel evaporates more quickly in warm weather than the summer blend and usually isn't permitted to be released until Oct. 31. But it's estimated to increase California's gasoline supply by 8% to 10% and make it 15 to 20 cents cheaper per gallon.

Meanwhile, Sen. Dianne Feinstein has called for a federal investigation into gas prices because she doesn't believe they're tied to supply or demand. She issued the same call in August, when gas was nearly 50 cents per gallon cheaper.

The problem is that the issues affecting California gas prices aren't California's alone, even if the consumer burden is. The average price of a gallon of regular gasoline in California on Monday was $4.69, or 20 cents more than it was on Friday, according to the AAA Daily Fuel Gauge Report. That's the highest in the country and well above the roughly $3.80 national average reported by the Energy Information Administration.

In portions of the car-dependent state, prices have jumped 60 cents in less than two weeks as refinery problems have created shortages and helped send wholesale prices soaring. Among the recent disruptions, an Aug. 6 fire at a Chevron (CVX) refinery in Richmond has one of the region's largest refineries producing at reduced capacity. A power failure in Southern California has affected an Exxon Mobil (XOM) refinery, which just came back on line Friday, and a Chevron pipeline that moves crude to Northern California also was shut down.

It's a scenario that could unfold anywhere in America and nearly has on occasion. There hasn't been a refinery built in the U.S. since 1976, which means each time one goes offline for a bit or shuts down, the gap between crude oil and gasoline supplies widens. Analysts were predicting disastrous results for Northeast gas prices last year, when Sunoco (SUN) announced plans to shut a Philadelphia refinery and said imported crude oil prices were getting too high and supplies of regional gasoline were too great for decreased demand. The Carlyle Group, a private-equity firm, disagreed and bought the plant in July to continue gasoline-refining operations and to handle natural gas from the nearby Marcellus Shale.

Sunoco wasn't wrong in its original assessment: U.S. gasoline demand is waning. According to Tom McClellan, the editor of the McClellan Market Report, U.S. gasoline usage peaked at 399 million barrels a day back in August 2005 before dropping more than 10% since. McClellan, the EIA and the Census Bureau say usage actually peaked at nearly 1.32 gallons per person per day in 1990 before increased automotive efficiency and telecommuting dropped usage closer to 1.12 gallons per day this year.

But gas prices are 50% higher today than they were in 2008, when oil prices were about $50 higher per barrel. Energy blogger and Christian Science Monitor columnist Keith Schaefer said in his column last month that cheaper domestic crude is a big part of the reason gas prices are so high. The EIA says U.S. crude oil production is up nearly 1 million barrels from last year, which Schaefer says is fueling interest from other countries that want our cheap crude exports.

Sen. Feinstein is right but wrong: U.S. gasoline prices aren't based solely on U.S. gasoline supply and demand. They're based on its crude supply and demand as well. If it's in more demand elsewhere, that's less supply headed here. Not that North America has the refinery capacity to handle it. The nation saw what refinery shutdowns did in California, but an explosion at Irving Oil Corp.'s refinery in Saint John's, New Brunswick, in September jolted gas prices 2.3% nationwide on the New York Mercantile Exchange.

Meanwhile, gasoline prices were also goosed when Hovensa LLC shut a St. Croix refinery in February that supplied 95,000 barrels a day of gasoline to the East Coast in 2011 -- or 3% of consumption -- and when ConocoPhillips (COP) shuttered its Trainer refinery in Pennsylvania last year. Delta Air Lines bought the Trainer facility earlier this year and put it back into action last month, but the loss of the two refineries helped Northeast gasoline prices spike 36 cents per gallon within the past year.

Commodities brokers know the refineries troubles all too well and are starting to place huge bets on commodities futures as peak winter heating demand nears. As noted by Fortune, and as we explained last week, a recently released United Nations report explicitly states that the "financialization" of commodities markets -- "hundreds of billions of dollars of bets placed on expectations of temporarily rising prices" for energy, food and other goods -- is the "root cause" of elevated prices. Those bets pushed this summer's global oil prices 65% higher than the averages reached during the commodity price boom of 2003 to 2008 and are spreading the consumer pain far beyond California's borders.

Oct 8, 2012 4:34PM
You can thank Steven Chu for the oil prices sky rocketing since Obuma appointed him head of the energy commission. He wants to get our gas prices in line with europe's and he is running out of time if Obuma isn't re elected.
Oct 8, 2012 4:13PM

The biggest influence on gas prices is the oil companies themselves PERIOD!!!


They use any excuse to either raise or maintain high gas prices, and when one of there excuses runs out of steam, they just make up another. 


Isn't it funny that when oil prices are high, that is the reason for gas being high, but when oil drops, it becomes a refining capacity issue.  Can oil companies suddenly refine more oil into gasoline when the oil costs more?  If we can't refine enough oil into gas to meet our own domestic demand, why is refined gasoline our biggest export product. 


I hear a lot of political speak about being dependent on foreign oil, yet this article talks about our cheap crude exports.  If we are dependent on foreign oil imports, why would we export a single barrel?


When the wind blows in the Gulf of Mexico, gas prices go up.  Now problems in CA and gas prices go up.  Does the gasoline supply for the entire county come through BOTH of these locations at some point?


With any natural disaster, mechanical issue, or foreign government uprising prices go up.  Whats worse is when there is only a possibility of any of these, prices go up.  But if the issue either cycles through or never comes to pass do we see prices go down accordingly?


The demand for gas goes up and the price goes with it.  We as consumers reduce the demand for gas, but the price doesn't reduce.  Summer time blends cost more, but do we ever really see a price reduction for the cheaper winter blends?


Gas prices can vary as much as 20 cents per gallon in a 20 mile radius on any given day, some within the SAME retail chain.   Yet when prices go up EVERY location raises at the same time.  Prices increase by Nickels and Dimes, but reduce by Pennies at a time.


Our govenment says it can't take any action against "Big Oil" for price fixing or price gouging because they lack sufficient definitions of exactly what those would be.  I say just look at my comments above and the definitions become crystal clear!


Oct 8, 2012 4:55PM
We are getting rapped financially while the oil baron are packing the profits. There is no reason for one refinery to bring the citizens of California to their knees financially. I dont even by gas from the refinery who had the minor problems. As much as I hate it, it is time for the government to do something productive and bring about tight price controls on the oil industry. If we can import oil, refine it and then export it, then we can bring gas back to $2.00 a gallon where it begins. Time for a consumer revolt.
Oct 8, 2012 5:59PM
You need to ask this question, back in Jan 2009 gas was $1.86 here in NY, now it is $3.96. Another 4 years of barry and well you do the math. But I got to tell you everyday gas goes up, and so does my gold and silver. So keep voitng for those Dumbocrats, paying more and more for gas, and keep making me more money. I guess that is what is know as a win win, thanks again.
Oct 8, 2012 3:34PM
The price paid for gasoline will eventually bankrupt this country. Commodities have gone thru the roof in an attempt to keep the truckers paid thru surcharges for diesel. What next?
Oct 8, 2012 5:32PM
California another democratic run state...wants some more vote Obummer.
Oct 8, 2012 3:53PM

The price paid for gasoline will eventually bankrupt this country. Commodities have gone thru the roof in an attempt to keep the truckers paid thru surcharges for diesel. What next?


Part of the solution is pretty easy to call...switch to natural gas in diesel engines.

Oct 8, 2012 5:05PM

"oil prices were getting too high and supplies of regional gasoline were too great for decreased demand." - So supplies are too great and the price goes up?


 "U.S. gasoline usage peaked at 399 million barrels a day back in August 2005 before dropping more than 10% since.""But gas prices are 50% higher today than they were in 2008, when oil prices were about $50 higher per barrel." - So demand is down, crude is down, but yet gasoline is at record levels?!?! Am I missing something here?


Why is it that when I read anything having to do with energy it's always backwards. I recall reading an excuse from AEP in 2009 that they had to raise they're electric rates because demand was DOWN..



Oct 8, 2012 5:52PM
We have allowed ourselves to think gas would not end, cheap gas would last forever yet the refineries are fifty to seventy years old, the machines that we rely on are coming to end of life and our EPA with OSHA and NIOSH have so hamstrung the industrial sector they cannot, will not replace these facilities, our own faults.
Oct 8, 2012 3:54PM
We need the pipe line from Canada to be competitive with foreign import oil companies. Shipping costs are not free. With few raises the cost of transportation to and from work is taking away from the earnings of the working people. We made it through hurricane season o.k. and still gas prices go up with a refinery explosion. We need another energy source with less pollution & risks. Magnetic or solar electric still need improvements. Don't give up. The oil companies need their Christmas bonus and summer was a bust for most who could not afford to travel. Stimulus Inflation is a money shark that takes away happiness due to increased costs of all necessities..
Oct 8, 2012 8:25PM
California screwed themselves again with too many regulations and rules. They want to control and macro manage the oil industry and now have created their own bad situation. Special blends, no new plants and razor edge supplies spells runaway prices.
Oct 8, 2012 5:20PM
Yeah. If the ultra environmentalist and ultra liberals start migrating to other states those states could be in trouble in the future. 
Oct 8, 2012 5:32PM
If terrorist wanted to bring us to our knees all they would have to do is interupt gas flow.I hope those refineries have a strong security force and not some 65 year old man guarding it for $ 8 hr.
Oct 8, 2012 4:16PM

Oil Company’s and banks should never have bean allowed to MERG, GOVERNAMENT has sold the common people to these company’s.

Oct 8, 2012 6:52PM
Do what the gov does everyday, write em a bad check!!!
Oct 8, 2012 5:04PM

Volt and Leaf sales will be going through the roof.


They are probably the ones behind the spike out there in Liberal Land..... you guys do a beter job of screwing each other than anyone.

Oct 8, 2012 5:54PM
We have a lot of "Prune Pickers" moving here, just what we don't need, more liberals!  Last time gas was high here Sen. Murray was going to do an investigation, nothing ever happened!
Oct 8, 2012 6:15PM
If you check the past gas prices in Washington and Oregon you will see that the regulatory requirements of California are effecting other states.  Earlier this year when California had most of their refineries shut down it was Washington and Oregon that had to pay the bill.  This is typical of gasoline shortages in California.  This time, it seams that California cannot siphon off gas from it's neighbors because we have only seen a $0.01 cent increase, so far. Holding my breath.
Oct 8, 2012 10:16PM
Congrats to the liberal California politicians and those who voted them in.  You get what you deserve.
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