The Ultimate E-Ticket: California Gasoline Prices*

Link to article: https://stillwaterassociates.com/the-ultimate-e-ticket-california-gasoline-prices/

October 22, 2019
By Dave Hackett

On Monday, October 21, my friends at the California Energy Commission (CEC) released “Additional Analysis on Gasoline Prices in California.” This report is a follow-on to a May 2019 report that had been requested by Governor Gavin Newsom. Both reports examine why California gasoline prices are higher than the rest of the country. These works build on the analysis that the CEC did in 2015 during the tenure of the California Petroleum Market Advisory Committee (PMAC), of which I was a member.

Since the Torrance refinery shutdown in February 2015, retail gasoline prices in California have been higher than average U.S. retail gasoline prices, even after accounting for California’s unique gasoline quality, higher taxes, and cost pass-through of the state’s climate change policies. My PMAC colleague, Severin Borenstein, has written about this issue extensively. Stillwater has written about this issue as well.

The CEC’s May analysis “pointed to possible causes including refiner margins, refiner outages, crude oil prices, retail margins and other factors…”

In its latest report, the CEC concluded:

1. “…while refinery outages have an impact on prices, which are reflected in higher refiner margins, these spikes are short term in duration (months) and do not account for the sustained price elevation seen over the past five years.”
2. “The CEC does not have any evidence that gasoline retailers fixed prices or engaged in false advertising.”
3. “The CEC concludes that refiner margins are not the cause of the residual price increase in California”.
4. “California consumers continue to purchase higher-priced brands despite having many options.”
5. “CEC staff concluded that the primary cause of the residual price increase is simply that California’s retail gasoline outlets are charging higher prices than those in other states.”

So, why is it that Californians are willing to pay a higher price, rather than switching to a lower-priced brand? In my opinion, Californian’s are not being irrational. They can go to the Big Box retailers but have to wait in line to gas up. Many consumers calculate the time spent not waiting in line is worth the higher pump price. These folks also want to avoid the crowd and may want other services, like window washing materials or a nearby convenience store.

Stillwater’s analysis shows that the state of California has twice the drivers per gas station compared to the national average. In other words, there aren’t enough gas stations.

This lack of sufficient infrastructure is a reoccurring theme along the fuel supply chain. In our view, the lack of sufficient pipeline and storage capacity leads to extreme volatility at the wholesale level as well. We first described this in our study for the CEC on a strategic fuel reserve in 2003. This report was written in reaction to an Attorney General’s Task Force report in 2000 on gasoline prices.

Ethanol & Gasoline

The latest example of infrastructure insufficiency is the shutdown of the NuStar Energy terminal in Selby/Crockett, up in the Bay Area. One of the jobs of that terminal is to take in ethanol by train and tanker and store it until it is trucked to gasoline distribution terminals in the Bay Area for blending with gasoline blendstock and then delivered to gas stations. Retail gasoline has 10% ethanol and the gas that the refineries make needs that ethanol blended in at the terminal to meet marketable specifications like 87 octane.

On Wednesday, October 16, a fire broke out in two of the NuStar ethanol tanks. The fire was put out without any injuries, but the terminal was shut down pending an investigation. As of this writing, the terminal is still shut down.

Since NuStar’s shut-down terminal in Selby is the major supplier of ethanol to gasoline distribution terminals in the Bay Area, soon those terminals will start to get low on ethanol supply. The oil companies will be working hard to truck ethanol in from other locations, and hopefully this will happen without any product runouts. Without ethanol, however, you can’t make retail-quality gasoline.

In California, as in most other U.S. markets, all gasoline is blended with 10% ethanol. If sufficient volumes of ethanol can’t make it to the California market served by NuStar Selby, well, you might not be able to find gasoline at any price at gas stations in the Bay Area.

PG&E Power Outage

When Pacific Gas & Electric shut down its power lines, it also cut the power to the Kinder Morgan pipeline that delivers transportation fuels from the Bay Area refineries to Reno, Nevada.  Nevadans may also have to pay the price for infrastructure issues here in California.

The point of all this: Gasoline infrastructure – like power, water, and natural gas infrastructure in California – is constrained and non-resilient. It can only take so much before it breaks.

* E-tickets were admission coupons for Disneyland and Magic Kingdom before 1982. Purchasing them would get you admission to the newest, most advanced, or popular rides and attractions.

Categories: Economics, News, Wisdom from the Downstream Wizard