Gasoline Price: How Oil Spill Sparked Increase : Independent Refiners’ Response Believed Major Factor in Boosting Costs to Southern Californians

After a week that saw wholesale gasoline prices in Los Angeles shoot up by a dime to 72 cents a gallon for no clear reason, March 24 began with Bill Wright getting offers of discounts from the independent oil refiners that sell him gasoline.

“The market was staged to go down that day,” recalled Wright, owner of Wright Oil Co. of Santee, whose 40 tanker trucks peddling 30 million gallons a month make it Southern California’s biggest distributor of gasoline to independent service stations.

But that was before word spread from Alaska that an oil tanker bound for Long Beach had run aground, spilling 10 million gallons of oil and--importantly for West Coast motorists--closing the port of Valdez. That cut off the source of 40% of California’s crude.

“When the news got out,” said Wright, “the refiners were all of a sudden saying they’re out of gasoline. They raised prices as high as they could to stop the demand for their gasoline, because every gallon they sold that day was a gallon they wouldn’t be able to sell the next week for a lot more money.”

Sure enough, in a few days some were getting as much as $1.07.

Called ‘Classic Case’

“This was a classic case of refiners increasing their (profit) margin as far as the markets will take it,” says Fereidun Fesharaki, an oil market expert at the government-funded East-West Center in Honolulu. “These differentials (between crude and wholesale prices) are some of the largest refining margins ever recorded.”

It is too simple to blame the whole post-spill run-up in local gasoline prices on independent refiners, an assortment of about a dozen low-profile companies that ride the roller coaster of energy prices. Sometimes they get rich and sometimes they go broke.

But observers say that--in addition to the skipper and third mate of the grounded Exxon Valdez--it was the independent refiners that made the biggest difference in Southern California gasoline prices over the last two weeks. Major oil companies also played a role by purchasing backup oil supplies at premium prices that were passed along, at least in part, to their dealers and motorists.

The actions of independent refiners were “an exaggerated response to a short-term situation,” said M. Craig Schwerdt, the oil analyst at Amdec Securities in Los Angeles. “They figure they’ll have to scramble for replacement oil and they anticipate that it’s going to cost more. But they don’t wait to pass (the costs) through, they pass them through now to widen the spread.”

Although the domestic logistical problem that interrupted supplies was fundamentally different from the faraway political events that caused the gasoline lines of 1973 and 1979, some of the effects were the same.

There was panic and hoarding, participants say, but on a much smaller scale than occurred during the 1970s. Nonetheless, the actual cutoff of 2 million barrels per day was comparable to the average daily cutoffs from the Middle East to the United States in 1973 and 1979. Experts say the Alaskan spill held the potential for much greater dislocations than actually occurred.

Despite plentiful worldwide supplies of crude oil, U.S. gasoline inventories have been tight for almost a year as demand exceeded expectations while refinery capacity has shrunk. Those conditions were worst in California, and seasonal factors such as scheduled spring maintenance of refineries were also pressing prices up.

“You were already close to the ragged edge. If that interruption had continued for another week, like the governor of Alaska wanted, you’d have had lines at the gasoline stations,” said Robert Cunningham, a vice president at Turner, Mason & Co. in Dallas, a refining and marketing consulting firm.

Prices Already Rising

The effect on prices varied widely, and no conclusive data is yet available. The picture is muddied by the fact that gasoline prices had been climbing for months along with crude oil prices, and there had been an especially steep run-up in Southern California wholesale prices charged by independent refiners just before the oil spill.

Exxon believes that the prices charged by major oil companies to their own dealers climbed 10 to 11 cents on the West Coast after the oil spill, an estimate supported by informal surveys of Los Angeles prices at the pump. But for the independent service stations, the increases amounted to as much as 35 cents a gallon--forcing them in many cases to sell at a loss or lose customers.

Charles Imbrecht, chairman of the California Energy Commission, said the overall price run-up was less severe than it appeared because the independents account for less than 20% of the gasoline sold in Southern California.

Pump and wholesale prices appeared to have peaked by week’s end as shipments from Alaska returned to normal, and Imbrecht and others predict a steep tumble in two weeks as cargoes of crude from other ports here and abroad reach California. But Schwerdt, noting the approach of the summer driving season, disagreed.

“This couldn’t have happened at a worse time for consumers,” he said. “Theoretically, the markets should give it all back. But realistically, they’ll give back about two-thirds of it. It’s always two steps forward and one step back.”

As recounted by various players last week, the immediate price hikes by independent refiners on news of the oil spill rang alarms in what is a Byzantine, rough-and-tumble business. In a matter of days, participants say, the system was flirting with panic.

Airlines Boost Orders

Airlines boosted their jet fuel orders from Atlantic Richfield by 5%. Numerous wholesale distributors made “unusually large” purchases from Shell and Texaco refineries.

Those moves, which recall the massive, undetected stockpiling by industrial users of gasoline, diesel and other fuels that helped cause the gasoline lines of 1979, were one reason cited by Shell and Texaco for restricting their deliveries of gasoline to middlemen.

Shell, insisting it expected no shortage of supplies, imposed a limit of 90% of year-earlier allotments on about 118 “jobbers” who distribute gasoline to about 800 independently owned stations in the West, one-third of them in California. Texaco limited such distributors to no more than they bought in March. Similar limits were reported by Arco, Exxon and Chevron.

But those moves--in each case affecting a relatively small portion of the companies’ business--also served the purpose of helping to assure plenty of gasoline for their own dealers at the expense of the independent competition.

Running out of gasoline is considered the ultimate snafu, and while the big oil companies issued reassuring public statements that there was no supply problem, some were scooping up extra gasoline anywhere they could find it--including at independent refineries.

With their money, market dominance and professional staffs that recognized the ramifications of the Alaska situation, the big oil companies acted before the smaller buyers knew what was happening.

Spot Prices Climb

In Los Angeles, the world’s biggest gasoline market, the independent refiners waited with open arms. The majors’ scramble for gasoline drove up spot prices nearly 20 cents in four hours and up to 35 cents over a week’s time. They effectively captured several days’ worth of production by some independent refiners, thus cutting off important spigots to independent service stations, says distributor Wright.

Wright Oil suddenly had difficulty finding gasoline for its clients, he says, quoting refiners: “We aren’t selling to you, we’re selling to the majors.” He estimates his deliveries fell 30% to 50% last week.

Most big oil companies would not discuss such moves, but Chevron--which normally relies heavily on other producers’ Alaskan crude to supply its operations in five Western states--says it filled up to 15% of its demand last week by buying gasoline from outside its own system “at a higher price than what we were selling it for to our dealers.”

That is a happy situation for those with gasoline to sell, especially when the price of crude oil--the refiners’ raw material--is rising only moderately. Los Angeles oil consultant James McDonald says the posted price of Alaskan and Long Beach crudes climbed the equivalent of only about 12 cents a gallon after the spill, while independent wholesale and retail prices were jumping about 30 cents. The difference is mostly extra profit.

Repeated calls to independent refiners in the Los Angeles area brought no response except for Frank Sisti, president of Ultramar Refining in Long Beach, whose wholesale price increase of 23 cents a gallon put it in the middle of the pack.

Sisti insisted that his company’s “margins are being squeezed” nonetheless.

‘Supply and Demand’

“I’m just a simple guy from Brooklyn. I believe in the law of supply and demand,” Sisti said.

The refinery business generally has been enjoying record profits since crude oil prices fell steeply in early 1986, slashing raw material costs and boosting demand for refiners’ products.

Ron Appel, owner of United Oil Co. in Los Angeles, which has about 26 independent and Arco stations and has been hit hard by the refiners’ prices, said: “I think the gouging began with the independent refiners, and the motive is they’re making a tremendous profit.”

But compared to the major oil companies already worried about their image in the wake of the disastrous oil spill, Dallas consultant Cunningham said the independent refiner “has to scramble faster and is less statesmanlike. If you’re going to castigate them, you also have to pass them some roses for having survived until now.”

The week’s events opened up a huge spread between the pump prices charged by the stations flying the flags of the major oil companies--which were getting most of their gasoline from their own refineries at moderate prices, while absorbing any losses on spot-market purchases--and those charged by the independent dealers.

Charge 10 Cents More

The major oil companies, led by Arco, Chevron and Unocal, have more than 80% of the California market. But their refineries apparently boosted wholesale prices only by about 10 cents a gallon on average--about what happened at the pump.

Several independent dealers said they were paying more per gallon to their distributors--a price that does not even include 18.3 cents in state and federal taxes--than nearby major-brand competitors were charging motorists at the pump. Their choice was to close, which several reportedly did, or sell at a loss.

The spread posed the risk for the majors of a run on their gasoline, a fact that they use to justify raising prices themselves. Officials at Arco, which maintained its usual low-price leadership last week, said their gasoline sales were no greater than pre-oil spill planning had projected for the period. But dealer Appel said:

“Business dried up at my independents and it’s booming at my Arcos.”