Big Oil Defends Rising Prices
Motorists fumed, regulators lectured and oil executives preached the free market Thursday as the price of gasoline in California continued spiraling upward to the highest levels of the ‘90s, with no relief in sight.
As Big Oil testified in Sacramento that the sharp run-ups were due to tight supplies and high demand--backing off earlier arguments that new, cleaner-burning fuels were to blame--emotions ran so high that there were anonymous threats. Officials had to beef up security.
At a Chevron station on San Ysidro Road near Santa Barbara, Ernest Bryant, 64, paid an eye-popping $2.19 a gallon to fill his van. The good news? “I’m in the oil business, so the higher the better I like it. I’ll get it back.”
In Costa Mesa, retiree Lou Mayersohn was spending $66.59 just to top off the tank in his Winnebago. “Wow,” he said.
And on Metrolink, some commuters abandoned their cars for the train: ridership jumped by 6% to 12% this week compared to earlier in April.
These echoes from the 1970s will likely continue to reverberate across California for some time to come, a parade of top oil executives, refiners and others told an overflow and sometimes hostile audience of nearly 200 at the California Air Resources Board meeting that stretched into the evening.
Against a backdrop of the sharpest California gasoline price hikes since the Persian Gulf War, oil executives soft-pedaled their previous arguments that the high prices were due primarily to the higher cost of producing new state-mandated cleaner-burning fuels required on June 1.
Prices are simply following the market, said Ronald J. Kiracofe, a senior vice president with Arco Products Co., the refining and marketing unit of Los Angeles-based Atlantic Richfield Co. and the state’s largest retailer of gasoline.
“The bottom line is that prices are dictated by supply and demand--competition,” Kiracofe testified. “We suggest the board allow the marketplace to sort out the current volatility.”
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Average retail gasoline prices in the state have spiked more than 32.3 cents a gallon since January to about $1.473 a gallon as of this week, the California Energy Commission reported. But such figures are moving targets, and the averages belie the far higher prices charged at stations across the state.
The Chevron station in affluent Montecito was charging $1.659 for self-serve regular unleaded but $1.959 for the same grade full-serve. Premium unleaded ranged from $1.899 to $2.199.
Reactions of outrage were common; others were surprisingly sanguine.
Interior designer Candace Humber of Rancho Santa Fe, a wealthy San Diego bedroom community, said as she filled her tank Thursday at a Texaco station in Del Mar that higher prices are “what you need to pay to get around. It comes and it goes and this too shall pass.”
While the oilman filling his van might not mind, Lionel Guzman of Placentia does. The owner of a turf business with golf course clients spread across Orange and San Diego counties, he spends long hours on the road in his pickup truck and has to swallow the added fuel cost.
“What bothers me is they haven’t justified the increase. At the same time, we have to do what we have to do, regardless of the gas price. I just pull in and pay for it,” Guzman said.
And it is a rude awakening for those who did not face the oil price run-ups of the past two decades. Stacy Houston of Santa Ana, a 20-year-old student, got her used Honda Civic only a couple of weeks ago; now she’s paying $1.55 a gallon at her neighborhood Mobil.
“It beats walking, but these prices are killing me,” she said.
If there is a villain, judging from testimony at the hearing, it would be refiners, whom many speakers accused of price gouging. Their argument was given some weight by California Energy Commission Chairman Charles R. Imbrecht, who testified that the refiners’ share of the total price of a gallon of gasoline accounted for the largest piece of the price hikes.
“I believe they’re looking at huge windfall profits, and these are companies that have already shown record profits for the first quarter of this year,” said Jan Speelman, executive director of the Automotive Trade Organizations of California, which represents independent service station owners.
Imbrecht provided a breakdown of the components of the price increases. The largest share was what Imbrecht called the refiners’ margin, the difference between the wholesale price of gasoline and the price of the crude oil from which it is made. The margin, which represents the refiners’ cost and profit, has soared by 25.1 cents per gallon to 46.4 cents per gallon since January.
By contrast, the cost of producing the new cleaner-burning gasolines, which refiners once blamed for causing the price hikes, accounted for only 5 to 8 cents per gallon of price increases, Imbrecht said. Rising crude oil prices and taxes accounted for the rest of the price hike, he added: rising crude oil prices have added about 12 cents per gallon in California.
Crude prices have been rising nationally as traders hold lean inventories out of fear that the United Nations will soon allow Iraq to begin limited oil exports, driving the price of oil down dramatically.
Other factors cited include abnormally high demand for heating oil during the long winter, early demand for agricultural fuel in California, and the start of the peak driving season.
Imbrecht said the increase in gasoline prices represented a sizable loss to the state’s economy, amounting to $2.5 million per day in direct costs, or $5.2 million if taking into account related costs. In any case, both oil industry officials and their critics agreed that the board should do nothing to lift its regulations requiring the production and sale of cleaner-burning gasolines, arguing that such a move wouldn’t alleviate the high prices and would undermine the state’s aggressive efforts to clean up California’s air.
For Air Resources Board Chairman John D. Dunlap III, the hearing was a chance to, so to speak, clear the air about the role that the mandate for cleaner-burning gasoline has played in the gasoline market.
“We are serious about finding out our role in this whole pricing picture, and we’re concerned about that,” he said.
Thursday’s testimony seemed to vindicate the agency’s approach, he said. But, he added, if the board finds that refiners have been raising prices unfairly, it has a number of options to pursue with the state energy commission, the governor’s office and other agencies. He declined to detail those options.
Imbrecht, who has implemented the first phase of an emergency monitoring system to keep tabs on the state’s fuel supply, said market problems began when several state refineries had accidents that cut production.
At one point, the production of gasoline was 100,000 barrels per day less than demand, requiring refiners either to rely on inventories or find supplies elsewhere. One refinery, the Shell unit in Martinez, will remain partly shut until June.
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At the same time, refiners who had ample supplies raised prices to prevent a run on their inventories, oil executives said.
“The only valve we have is price . . . to keep the system running in balance,” said Chevron refining executive Al Jessel. He added: “I know people are very unhappy with the price of gasoline and the price of diesel . . . and we sympathize.”
But Imbrecht said that as of Wednesday the shortfall had narrowed to 18,000 barrels below the daily demand of 864,000 barrels. Yet, prices have continued to rise, critics noted.
On Thursday, Arco found itself a target of board members and others who repeatedly questioned Kiracofe on the mechanisms of its decision to raise prices. Arco kicked off the latest round of price hikes last week when it announced a 9.25-cent-per-gallon jump in its wholesale prices in a single day, April 16. Other refiners soon followed.
At the time, Arco attributed the bump to the cost of producing cleaner-burning gasoline. It backed off that statement later, and on Thursday attributed the jump in part to its need to buy supplies on spot markets to meet strong demand.
“What we were trying to do was respond to what was going on in the marketplace, and allow ourselves and our dealers to recover what was going on in the marketplace,” Kiracofe said outside the hearing.
The explanations did little to mollify critics who showed up en masse to observe the proceedings, expressing their displeasure with oil executives with occasional grumblings. Perhaps the toughest crowd was the truckers, hit hard by soaring diesel fuel prices.
About 100 members of the California Trucking Assn. showed up sporting red buttons reading: “Trucks Feed My Family, and Yours.”
“It destroys us,” said Rich Leimbach, a spokesman for Think Fresh Transport, a Los Angeles-based trucking firm with 21 trucks. “Either fuel prices go down, we go out of business or we move out of state.”
Staff writers Marla Dickerson in Orange County, Chris Kraul in San Diego and Gali Kronenberg in Santa Barbara contributed to this story.
