Gasoline Prices: A Case of Cheating, Not Competing
Sound Familiar? Think Back to the Electricity Crisis
by Jamie Court and Tim Hamilton
March 16, 2004

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If the recent sticker shock at the gasoline pump feels familiar, that's because it is the same old story that led California's electricity market to become the embarrassment of the nation.

California Atty. Gen. Bill Lockyer is convening today in Los Angeles a panel of industry experts who have blamed the run-up on OPEC crude oil prices, environmentally sensitive fuel and free-market pressures. But the problem is as simple as California's electricity crisis turned out to be: A few giant energy corporations have manipulated supply to keep profits high.

During the blackouts, electricity barons like Ken Lay blamed the crisis on overuse and market restraints, but state investigations later found the real problem was that unregulated electricity plants were strategically shut down to reduce supply and make prices skyrocket.

Similarly, California's special gasoline formulation -- as required by the federal government under Clean Air rules -- has been made to appear rare by the small number of refiners that make the special mix and have gradually closed refining plants.

The recent 20-cent-per-gallon increase in California -- compared with just a 5-cent increase nationally -- is the result of cheating rather than competing by seven refiners that control more than 99% of the state's gasoline supply.

The tip-off is that the increased costs to motorists are turning out to be pure profit for Big Oil, not reflective of real production costs.

The California Energy Commission estimated recently that the 41-cent average increase in retail gasoline prices in January and February would reflect a 40% rise in refinery profit margins. This keeps with the pattern of huge quarterly profits for California refiners after every price surge during the last three years.

By strategically cutting the number of state refineries almost by half since deregulation of gasoline in 1981, even while the state's population has exploded, the refiners have created conditions under which price spikes occur regularly. Inventories are kept low so that when there is a problem at a refinery -- such as a fire -- the market anticipates a shortage and sends the speculative price of gasoline sky-high. Refiners make a killing because it doesn't cost them any more to produce the gasoline, which they can charge more for.

Internal industry memos recently released by Sen. Ron Wyden (D-Ore.) show how big West Coast refiners drive out independent refiners to erase competition. The 1996 memorandums from Mobil referred to the successful strategies to keep smaller refiner Powerine from reopening its California refinery. One was promoting tough California regulations that Mobil believed Powerine couldn't comply with. A plan that could be used in the event Powerine did open the refinery was " ... buying all their [available fuel] and marketing it ourselves" to ensure that the lower-priced fuel didn't get to market. In the memo, Mobil acknowledged that the strategy of buying competitors' gas to keep it off the market had been used in the previous year, resulting in significantly increased prices.

A major problem Californians now face is that Shell recently announced it would close its Bakersfield refinery this year. The Bakersfield plant provides 2% of California's total gasoline supply and 6% of its diesel needs.

Reflecting the state of the oil industry, Shell reportedly did not even seek a buyer for the refinery. Wall Street refers to such a closure as "refinery heaven" because it would result in higher prices at Shell's remaining refineries and encourage greater price increases that would benefit every refinery in the market. Instead of refineries competing with one another by creating more supply, they all work together to restrict supply so that they all profit wildly.

Three-dollar-a-gallon gasoline will be coming if Shell's refinery closes. That's why the attorney general and the Legislature must insist that Shell's 70-year-old Bakersfield refinery be kept open. A phone call from Gov. Arnold Schwarzenegger could allay an even bigger run-up at the pump. If the political pressure is not successful, Lockyer should be prepared to bring suit to stop Shell.

In California's car culture, gasoline is a necessity of life, and it is becoming increasingly unaffordable. There is ample cause to re-regulate gasoline. In the long term, perhaps only such a move will break the hold of California refiners.

Until our political leaders start talking tough about greater public control over the flow of gasoline, however, the in-state refining oligopoly will continue to extract even greater prices.

Jamie Court is author of Corporateering: How Corporate Power Steals Your Personal Freedom (J.P. Tarcher, 2003). Tim Hamilton is a petroleum industry consultant. This article first appeared in the Los Angeles Times, by way of the Foundation for Taxpayer and Consumer Rights.




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