For the past several weeks, California gas prices have jumped to around $4.67 a gallon on average, with many stations charging over $5.00 a gallon. (By contrast, I was just in Alabama last week where the price of gas was about $3.30 a gallon, and that’s typical of much of the nation). The official reason given for this price spike was an electrical problem in an Exxon Mobil oil refinery in Torrance, just as the refineries were making the transition from summer blend gas to winter blend gas. Earlier this August, we had another price spike due to a Chevron refinery fire in Richmond, California, that temporarily choked the flow of gas. Naturally, this has outraged the consumers, who lash out at the politicians, the oil companies, the hapless gas station owners, and anyone else they can think of. The price appears to be easing now, because Gov. Brown has urged the release of our winter blend gasoline three weeks early, but it has raised several important questions. How did this happen? Who is really behind it?
As usual, the public and even the media are blaming the wrong people, with crazy conspiracy theories abounding. For example, one right-wing pundit blamed it on illegal aliens filling up their gas tanks as they head back to Mexico before Romney’s victory! Contrary to popular belief, most politicians or government agencies have little or no ability to affect the short-term price of gas, except by extraordinary measures such as releasing gas from the Strategic Petroleum Reserve, or relaxing the rules on California’s gasoline refining laws. Even encouraging drilling in every possible place doesn’t help that much, because the extra American oil just goes into the overall supply, and may just as likely end up in China. Some are outraged that our gas here averages 30 cents per gallon more than most other states (except Hawaii, isolated from refineries). That extra surcharge was put in place long ago to combat California’s severe pollution problems and clean up our air. It’s a price that those of us who used to choke and get sick from smog are willing to pay. We remember first- and second-stage smog alerts here in L.A. in the 1960s and 1970s, and the air is MUCH cleaner now, with almost no smog to mention any more. Others blame the price rises on the pressures of China and India and their runaway development and consumption of oil, and that part is true—but they have nothing to do with the short-term spikes, only the long-term pressures. And as Matt Taibbi shows in his recent book Griftopia, the long-term rise of oil prices is driven more by the out-of-control commodities speculators, as much as it is by global demand due to expanding Asian economies.
Instead, a number of investigative journalists and economists have shown that the key culprits are familiar ones—large energy monopolies which have created artificial scarcity by restricting supply at key choke points, and driving up prices to make huge short-term profits. Because California’s anti-pollution laws make it necessary to refine special gas for California alone, the oil companies have deliberately kept their refining capacity just barely above the minimum, so any short-term disruption means a huge price spike. This allows them to charge 30 cents per gallon more than in other states, since it is not in their interest to make the price of gas in California competitive. In addition, the rest of the U.S. has on average about 24 days’ supply of gasoline on hand; California has only 10-13 days. Not surprisingly, oil companies have reported that their California refineries are consistently the most profitable in the U.S.
As the Los Angeles Times reported on Oct. 12:
Memos from West Coast oil refiners from the 1990s and released years ago by Sen. Ron Wyden (D-Ore.) suggest that this is a deliberate business strategy. An internal Chevron memo, for example, stated: “A senior energy analyst at the recent API [American Petroleum Institute] convention warned that if the U.S. petroleum industry doesn’t reduce its refining capacity, it will never see any substantial increase in refinery margins.” It then discussed how major refiners were closing down refineries. Oil company profit reports show each dramatic gasoline price spike over the last decade has been mirrored by a corresponding corporate profit spike. This situation is well known to policymakers in California. About a decade ago, after some sharp, unexpected price hikes, then-Atty. Gen. Bill Lockyer formed a gas pricing task force that included industry experts. We viewed industry documents and cross-examined industry representatives. Among the conclusions: “Supply disruptions that contributed to major price spikes of 1999 are likely to continue … because (1) California refiners have little spare capacity to cover outages; (2) California refiners maintain relatively low inventory levels.” The report also noted: “Refiners have significant market control.” The task force recommended a series of measures, including building a strategic gasoline reserve that could flood the market when supply is most scarce. But the Legislature didn’t listen. And now we are near 5 bucks a gallon.
Back in 2005, Shell attempted to bulldoze some of its refining capacity, and they were stopped by Sen. Barbara Boxer and Attorney General Bill Lockyer. Internal Shell documents released later showed that these refineries were very profitable and not losing money, so the only reason for Shell to destroy them was to tighten supply even further. In the most recent spate of price gouging, Sen. Diane Feinstein has ordered an investigation after Tesoro Energy was caught trying to squeeze the supply and was forced to buy outside oil to meet its obligations. But the underlying problem is consolidation: too few companies hold almost all our refining capacity, and there is no strong incentive for them to compete or make gas cheaper when gouging California drivers is so profitable. At the moment, Tesoro is trying to buy up Arco, our lowest-cost gasoline chain, currently owned by BP. If the California attorney general lets the purchase go through, Tesoro and Chevron will control 51% of the oil refining capacity in the state, making them a virtual monopoly able to manipulate the price any way they want (and eliminating Arco as the last low-cost national chain in California).
Those of us old enough to remember 2001 are having a sense of deja vu. Back in 2000, the huge Enron Corporation in Houston obtained control over much of California’s electrical grid. As their own internal documents showed, they then used this leverage to manipulate the electrical prices in California in the summer of 2001, generating 38 artificial rolling blackouts by getting suppliers to shut down for unnecessary maintenance, and playing all sorts of tricks to generate artificial scarcity, drive up prices, and enrich themselves. Later on, their internal communications were released showing them gloating over the crisis they had created here and over the wealth they had reaped from their crimes. The Feds finally stepped in during late June 2001 to curtail their activities, but the damage had been done to the California economy. Gov. Gray Davis was destroyed by these outside forces that he could not stop or control, and the voters unfairly punished him with a recall which then gave us the disastrous Schwarzenegger years. We all had the last laugh later in 2001 when Enron itself collapsed and its bosses went to prison over its corruption and criminal activities, but it was too late for California to recover from what an unregulated system of unscrupulous speculators and monopolies can do to the largest state in the union, and a state that by itself is the eighth largest economy in the world.
The Enron pirates were finally curbed by Federal regulators and then Enron collapsed of its own misdeeds, but no similar effort has been made to curb the power of the major oil companies in California. As this article points out, the easiest solution would be our own strategic petroleum reserve, or at least some sort of state regulation on the oil companies to force them to build refineries and create enough capacity to prevent future squeezes. So far, the Legislature has been unable to act on this idea, even though it is clearly in the best interest of California and its voters. This raises even larger issues: why is government so unwilling to regulate huge powerful corporations that are hurting the consumer (despite all the oil companies’ upbeat PR about how they are helping us)? We don’t allow aircraft companies or airlines to build or fly planes without multiple backup systems and strict safety regulations, so if one part fails, the plane doesn’t crash. It’s in public’s best interest to prevent this, even though it means a greater cost to build, maintain, and fly each plane. Why then do we allow oil companies to build insufficient refining capacity and periodically squeeze drivers and reap huge profits, when it’s clearly not in the public interest for them to do so? If ever there were a place for government regulation to prevent disasters for consumers and the economy, this seems to be a good example of it.
And the next time you hear someone raving about the virtues of unfettered capitalism, just remember the pirates of Enron—and the robber barons of the oil industry that still hold the nation’s largest state as a hostage.
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