Why Does Gas Cost So Much in California?

More unintentionally humorous content from the mainstream media on politically charged issues.   This from one of America’s newspapers of record, the LA Times:

Tesoro plan to buy Arco gets more scrutiny amid gas-price surge

As California gasoline prices set fresh records daily, consumer advocates are gearing up to fight the sale of the low-cost Arco brand and its Carson refinery to a Texas company not known for its cheap fuel.

Some experts are calling the proposed $2.5-billion sale to Tesoro Corp. of San Antonio the biggest shift in California’s petroleum business in decades. Activists say the deal, announced in August, would reduce competition and possibly raise prices for motorists, and they will ask state and federal regulators to reject it.  (read more…)

 

So gasoline is very expensive in California.  Could be because those evil oil companies are restricting supply in order to drive up prices and line their pockets with profit (which everyone knows is *bad*).

That’s exactly the kind of theory that’s been circulated for some time, that California producers of the special blend of gasoline required by state law would engage in OPEC-style market tactics.  That’s what one alleged expert academic alleges:

Severin Borenstein, an energy expert at UC Berkeley, adds that it’s also possible some state refiners are taking advantage of the shortfall by withholding some of their gasoline in order to jolt prices even higher. The supply of special reformulated gasoline that California uses is produced by just a handful of companies, with Chevron alone controlling more than 20 percent of the market. In certain circumstances, price-gouging might be quite profitable. “It’s not a crazy notion,” Borenstein notes, “it’s just extremely difficult to prove and, even then, not a violation of any law.” (read more…)

Sure, not a crazy notion, just difficult to prove. I think my neighbor kicks his dogs. I have no proof, but I hear them barking all the time.
And despite working hardat the puzzle cloaked in mystery wrapped in an enigma, and issuing academic white papers and studies and whatnot,  the good professor and his colleagues haven’t self-admittedly come close to unearthing tangible proof of this price-gouging.

Refine, Baby, Refine!

Could also be, as some “Drill-baby-drill!” proponents on the other side of the political spectrum are fond of pointing out, that California doesn’t have enough refining capacity commensurate with its large population.  “We haven’t built new refineries in this country in years and years, blah blah”.  Let’s look at those numbers:

California
Number of Refineries: 22
Refining capacity, in barrels per day (bpd): 2,409,0001
Population: 37,691,000
Residents per barrel of refined product: 18.39
Gallons per day per state resident: 2.28

This is is but a crude ratio (pun!), figuring barrels and gallons per state resident. Not all refining capacity is the same, many of those 22 refineries are quite small compared to Chevron’s El Segundo Refinery at 265,000 bpd, or even BP’s Carson refinery in question, also with a capacity around 265,000. Some refineries produce specialty blends or products such asphalt, jet fuel, lubricants, etc.

By comparison, let us see the refining capacity and population numbers for Oklahoma, state of residence of 101 Centavos and noted hotbed of oil production and exploration.

Oklahoma
Number of Refineries: 6
Refining capacity, in barrels per day (bpd): 507,900
Population: 3,791,508
Residents per barrel of refined product: 7.46
Gallons per day per state resident: 5.63

By these two data points, those on the right could (and do, regrettably) myopically argue that 38 Californians are on average scrabbling every day after each barrel of refined product.  Oklahomans have the chance to buy 5.63 gallons of go-juice, each and every day, while car-happy Golden Staters have to make do with less than half that, at 2.28 gallons per head.

Supply and demand, baby! The free market at work, that’s why granola-crunching Angelenos shell out  $4.61 a gallon at the pump, and dumb Okies in Tulsa pay the lowest prices in the country at $3.31.

Well, how about states that don’t have the oil and gas resources of Oklahoma?

Let’s switch focus to Mississippi, another poor but not-so-oily Southern state, one that many Oklahomans are thankful for — just so we’re not last in state rankings like divorce, obesity, and literacy.

Mississippi
Number of Refineries: 4
Refining capacity, in barrels per day (bpd): 409,800
Population: 2,978,512
Residents per barrel of refined product: 7.27
Gallons per day per state resident: 5.78

Average price per gallon in Mississippi?  $3.52 a gallon.  A-HA!  Well, that bears out, doesn’t it?  Put that in your medical marijuana pipe and smoke it, liberal lefty commie oil-hating enviro-fascists!

Err, not so fast.

Ohio’s up next.

Ohio
Number of Refineries: 4
Refining capacity, in barrels per day (bpd): 562,000
Population: 11,544,951
Residents per barrel of refined product: 20.54
Gallons per day per state resident: 2.04

A refining capacity even more dire than California, and what do Ohioans pay on average for gasoline?  About $3.64.

So much for that theory.

Like Good Blended Whiskey

Much has been said about California’s special summer blend, a gas formulation that is required by state law (specifically, by the California Air Resources board).  It supposedly reduces particulates and smog, and might be responsible for cleaner air standards. Presumably it also whitens teeth and gets rid of unsightly dandruff flakes. And, it’s more expensive. Having said that, many Californians prefer to live with cleaner air and pay more at the pump.

A neat top-down legislative solution whereby clean-living residents in Northern California get to subsidize Angelenos who choose to live in a huge basin area with poor air circulation.

No doubt this special blending is part of the high gas prices. Gasoline is a fungible commodity (and if you don’t believe that, Google “gasoline fungible commodity” or “gasoline commodity futures”), and refiners, distributors, oil companies, retailers, all buy gasoline from each other. They add their secret sauce, black-magic additives and emulsifiers that will zippify your fuel injectors and make your motor vehicle happy, and that’s about it.

Add in the occasional refinery fire and pipeline mishaps (leading to reduced production), and all are contributing factors.

The Elephants In The Room

How about a couple more gasoline price factors, that not unlike corner-dwelling pachyderms, don’t get their fair share of attention?

The first one is gas taxes.

Facts and Figures 2012: State Gas Tax Rates

The states with the lowest gas prices are also enjoy comparatively low taxes and fees (units gas prices provided by the good folks at Gasbuddy.com)

South Carolina, ranked 47th, first (or lowest) with $3.489/gal
Texas, ranked 38th, $3.518/gal
Mississippi, ranked 44th, $3.520/gal
Oklahoma, ranked 46th, $3.525/gal
Tennessee, ranked 36th, $3.545/gal

Now, let’s compare this with that the highest-taxed states pay for each gallon of gas:

California, ranked 2nd, and paying $4.61 per gallon
Hawaii, ranked 4th, $4.408/gal
Connecticut, sharing 2nd spot with CA, and with $4.088/gal
New York, leading the nation as FIRST (!!) in fuel taxes, and paying $4.083/gal for the privilege
rounding out the group is California wanna-be Washington, ranked 9th, and with $4.044/gal

Yep, no correlation there what-so-ever.

Capitalism Is Not Our Friend

Let’s take a leap and make a generalized statement: California is not especially business-friendly. Not a scintillating revelation, but nevertheless something that needs to be brought up in *any* discussion of *any* prices and costs, whether wholesale or retail or industrial or consumer. Especially when consumer prices are breathlessly talked about by the general media in Grapes-of-Wrath scenarios. To hear the sad story, hard-scrabbling consumers have to either sell the family cow or get quick online loans to afford a tank of gas.

Regulation adds costs. We could argue that it brings benefits, but it does adds costs. Simple as that. Much regulation adds much cost.

A bit of explanation.

Speaking as one who has direct experience with refinery projects, let me say that California projects are a PAIN. IN. THE. ASS. Doesn’t matter if its Chevron’s refinery in El Segundo or the Phillips 66 Rodeo complex, any oil and gas project in California is bound to be laden with page-inches of customer specifications, state regulatory compliance and regulation hoops. Page-inches, by the way, is simply the thickness of the project specifications, printed out and stacked up. When bidding a high-spec job, add so many margin points for as many inches. Not profit, mind you, but margin. That means that a project bid in California at 35% margin will (might) make the same profit as a 25% margin project in Texas. California has many high weeds, gotchas, and unforeseens. If you’re not careful, you’ll lose your butt.

Not to get into much more detail, just that high-regulation states like California and New York have project execution costs which are made higher by regulatory compliance. That factor will necessarily reflect in the cost of the end product, in this case, gasoline.

So In Conclusion… What?

So what’s the point? I suppose this falls under the category of “there’s always the rest of the story”:

- Journalistic laziness.
- Excessive market regulation will cost you.
- A state’s refining capacity has little to do with gas prices.
- Taxes have not a little to do with gas prices.
- Whether or not Tesoro will buy the ARCO brand from BP, it matters not a whit: gasoline prices in California will stay high.

That’s it for today, thanks for dropping in.

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This post was featured in the Carnival of Wealth – Fall Is Awful Edition.