Upward Pressure at the Pump
Here’s a sobering thought for all the Californians grumbling as they watch gasoline prices edge up this summer: It’s probably going to get worse.
Without new refineries, additional pipelines, expanded port facilities or a slowdown in consumption -- none of which is likely -- motorists in California and neighboring states will pay ever more at the pump, analysts warn, and endure more frequent and longer-lasting price increases.
“Prices are going to go up,” said Claudia Chandler, assistant executive director of the California Energy Commission. “As supplies get tight, that’s the way that the free market allocates resources -- by price.”
Until recently, the 16.2 billion gallons of gasoline and other fuel produced every year by the 13 refineries in California were enough to meet the needs of California, Arizona and Nevada. But explosive population growth in the Golden State, as well as in Tucson, Phoenix, Las Vegas and Reno, is straining the system.
Although output from the 13 refineries is inching up at 1% a year, the annual growth rate for gasoline consumption is 2.6% in California, 3.8% in Nevada and 4% in Arizona, according to the latest federal data.
Refineries make up the shortfall by importing gasoline from foreign countries, including Finland and the United Arab Emirates, at an average 4.2 million gallons a day. But if consumption projections are right and no new refineries come on line, imports will have to more than double by 2010 to meet demand. And the way they’re configured now, the pipelines and ports can’t handle the influx of that much more fuel.
That sets the stage for harsh conditions that officials in the three states haven’t figured out how to dodge. All that’s certain is that they are all in it together.
“California is tied to Nevada and Arizona when it comes to demand,” said Drew Laughlin, an energy consultant in Houston who has studied the California gasoline market. “As those areas grow ... you’ve got a situation that is going to be more and more difficult.”
Industry officials and consumer advocates agree that there is little chance of new refinery construction or expansion of existing refineries. The federal and state permitting process is so rigorous, environmental protection rules so strict and public sentiment so negative that the region has opened no new refineries since 1969.
Similar hurdles make it unlikely that offloading facilities at California ports will be substantially enlarged anytime soon, experts say. Port officials have little incentive to make way for more oil tankers, because ports rake in more money from cargo-packed container ships -- a business that is growing steadily and is less likely to cause damaging spills.
Adding to the supply pressures are state and federal clean-air mandates, which call for specific additives and blends of gasoline for certain times of the year. Those recipes generally are harder and more expensive to make, and the complications leave California, in particular, with gasoline prices typically higher than those in the rest of the country.
The refineries in California operate at near-peak capacity to make about 46.2 million gallons of gasoline a day. California alone consumes nearly 42 million gallons a day; the refineries send 5.3 million gallons daily via pipeline to Nevada and Arizona, supplying them with 90% and 60%, respectively, of their needs.
Two refineries in New Mexico and one in El Paso add to the mix. Arizona has no refineries, and the lone refinery in Nevada makes asphalt.
With supply and demand precariously matched, even minor production or delivery hitches can send pump prices soaring.
In March, for example, Navajo Refining Co.’s facility in Artesia, N.M., stayed off line longer than expected and crimped the flow of fuel into Arizona.
About 100 Phoenix gas stations owned by Costco Wholesale Corp., Albertson’s Inc. and others ran dry several times, said Debbie Powdrill, fuel manager for Total Energy Products and a vice president of the Arizona Petroleum Marketers Assn.
“It was a real eye-opener for me,” said Powdrill, whose firm buys gasoline wholesale, then sells and delivers tanker loads to unbranded gas stations as well as to landscapers and other businesses with fleets of trucks.
“We couldn’t buy it, so we couldn’t sell it,” Powdrill added. “After a while, the phone stopped ringing. A lot of customers ran out.”
It would have been worse had it not been for Los Angeles-area refineries, which boosted exports to their branded stations in Phoenix by 22% during parts of March, according to the California Energy Commission. That spared Chevron, Shell and other big-name outlets from having to turn away customers.
But the shipments to Phoenix helped drive up prices in California by “contributing to the severity” of the state’s own supply troubles, according to a March 28 report from the commission.
By March 17, the situation in Phoenix -- combined with an oil workers’ strike in Venezuela, worries about war in Iraq and a smattering of refinery problems in California -- sent the Golden State’s average pump price to a record high of $2.145 for a gallon of self-serve regular.
Gas prices remain high, pushed up by the normal pattern of growing demand in the summer. But as tight supplies become a perennial problem, consumers can expect to pay more year-round. As of Monday, gas prices averaged $1.79 in California, 17 cents higher than a year earlier.
Executives at the major refineries in California are loath to talk about day-to-day operations or plans for satisfying the region’s spiraling fuel demands. But all say they will do what it takes to serve their customers.
“There are challenges on these infrastructure issues,” said Mary Morgan, vice president of marketing for Houston-based Kinder Morgan Energy Partners, which owns the pipelines that carry fuel from California to Nevada and Arizona. “But people find a way to make all this happen -- because, obviously, there’s a lot of business at stake.”
Kinder Morgan, for example, has applied for federal permits to increase capacity on its pipe- line from El Paso into Arizona. A separate proposed pipeline project, the 700-mile Longhorn based in Texas, would connect prolific Gulf Coast refineries with El Paso and the Kinder Morgan line there.
Those two projects would substantially reduce Arizona’s dependence on the refineries in California, but they are so uncertain that energy officials don’t include them in regional supply forecasts.
In addition, a group of investors has laid preliminary plans for a $2-billion refinery near Phoenix that would manufacture 7.1 million gallons a day of the clean-burning gasoline that state and federal rules require for the metropolitan area. But this effort too is viewed as speculative until it lands the necessary approvals.
For their part, California energy officials are pushing programs that would ease the supply strain by encouraging drivers to buy vehicles that are more fuel-efficient. The state also is considering creating a “gasoline bank” that could be tapped when supplies are disrupted.
In the three-state region, some believe, the crux of the problem is that six major oil companies own 90% of the refining capacity.
Consumer advocates and some economists say that leaves motorists vulnerable.
“There’s a conflict of interest between the oil companies and the people of California,” said Tim Hamilton, a consultant and onetime service station owner in Olympia, Wash., who served on the task force formed by California Atty. Gen. Bill Lockyer after pump prices soared in 1999.
Like many distrustful of Big Oil, Hamilton suspects that the industry purposely is putting the squeeze on Californians.
If refiners weren’t sending gasoline to Arizona and Nevada, he said, “they’d reduce production or put gasoline on a ship to South America to make ... sure they didn’t lower pump prices in California.”
John Felmy, chief economist at the American Petroleum Institute, said he was familiar with Hamilton’s charge that oil companies ship gasoline out of particular areas to increase prices. “It’s just bogus,” he said.
Still, industry insiders say refiners naturally steer gasoline to those markets where they can maximize profits.
In the last few months, for example, a key fuel distribution terminal in Las Vegas was about to run out of gasoline. But refiners in California chose not to send additional supplies to the site even when they were informed that terminal storage tanks were close to empty, according to Morgan, the pipeline vice president.
“We called our shippers and said, ‘You’re going to run out.... Don’t you want to send more barrels?’ ” Morgan recalled. “And nobody did.” Industry experts figure that the refiners simply calculated that they would make more money by selling fuel at higher prices in California than they would by shipping additional supplies to Las Vegas.
The refiners declined to comment.
“You’ve got to look at the margin of what you’re producing and where you’re selling, minus transportation costs and everything else,” said Laughlin, the energy consultant. Refiners continually weigh many factors, Laughlin added, asking themselves, “If I have excess, do I want to sell that in California? Or do I want to sell that in Arizona or Nevada,” where prices may not be as high?
During the extended outage at the Artesia refinery in New Mexico, Ed Clark figures, he got a taste of the future.
As supply and marketing manager at Supreme Oil Co., Clark had the job of rounding up and distributing enough gasoline to keep the company’s industrial and gas station customers in Arizona in business.
“We were scrambling every day, all day, just trying to come up with one load,” recalled Clark, who now works at a different company. “Instead of taking 9,000 gallons to customers, we would make ‘milk runs,’ ” he said. “We would take 1,000 or 1,500 gallons and spread it around, and hope that the next day we could get more gas.”
Nevada hasn’t seen such drama but is no less vulnerable.
“We’re at the mercy of the California refineries, and so far they’ve treated us well,” said Peter Konesky, energy specialist with Nevada’s Office of Energy. If that changes, he joked, “We’re going to hire the 101st Airborne and send them out there to make sure we get our fuel.”
That might work -- except that the California refineries make the region’s jet fuel too.
