Q&A; : So, What Is Fueling Gas Hikes? : Arco Exec Says It’s Competition, Supplies

As gasoline prices in California remain at their highest levels since the Persian Gulf War, oil executive William C. Rusnack on Friday blamed the increases on sharp competition among retailers to buy new cleaner-burning gasoline amid tight supplies and uncertain production.

But Rusnack, the president of Arco Products Co., the refining and marketing unit of Atlantic Richfield Co. and the state’s largest retailer of gasoline, admitted that refiners will probably benefit financially from the period of high prices.

Rusnack spoke with Times staff writer Patrick Lee at the company’s headquarters in downtown Los Angeles.

Q. Why are gasoline prices so expensive, and why do the prices keep going up?

A. The initial and principal reason [is] that crude oil prices went up around the world, [by] somewhere in the range of $6 to $7 a barrel. That has a direct effect on the price of product, somewhere around the 16 cents per gallon range.

Out here in California, we have had a unique set of circumstances. We have been installing a lot of new equipment to make [cleaner-burning gasolines required by the California Air Resources Board, or CARB]. We’ve probably experienced . . . more start-up problems than we anticipated.

At our Los Angeles refinery, we lost about 15 days [of gasoline production]. Other competitors . . . have had similar or worse problems than we’ve had. That has had the effect of reducing the production of this new fuel. It’s also had the effect of creating uncertainty in the marketplace as to whether . . . there is adequate supplies. That competition has bid the price . . . up.

I know the question everyone has is, when is it going to go down and how much? I don’t know.

Q. Isn’t true that Arco led this latest round of price increases by raising its wholesale price 9 cents a gallon on April 16?

A. I can’t talk about anything we’ve done from a specific price standpoint. I can get into legal problems if I’m talking about it.

Starting in March, there were a series of price changes among all competitors out there. [But] crude oil prices started to go up far earlier than late March. During the month of March, people who were refining crude oil and turning it into gasoline and other products were actually getting their margins squeezed significantly.

In April, refiners tried to start recovering some of that cost that they were getting and started moving up price, and . . . then you look around and you say, “Jeez, what is the competition going to go? Do I go?”

Q. Charles Imbrecht [chairman of the California Energy Commission] said [Thursday] that Arco raised the price on April 16 by about 9 cents a gallon. Chevron followed a day later.

A. I don’t know that. It’s a continuous process. There is no beginning, and there’s no end.

How about if theoretically there had been a competitor out there who four days before had raised their price by 3 cents--and then two days later raised their price another 3 cents? And in the meantime, Arco did nothing. Then who precipitated what?

Q. Considering the fact that the refiners’ margin makes up the largest part of the price increase up until now, what do you say to people who accuse refiners of taking advantage of the situation to recover costs and increase their profits? People are accusing Arco and other refiners of price gouging.

A. Yes, there is no doubt that margins for refiners right now are higher than they normally are. But there’s also no doubt that in the month of March, margins for refiners were a lot lower than they normally are. And nobody accused refiners then of predatory pricing because they were holding prices low. . . . [As] the refiner had [no] control over the market in March, he has no control . . . in April either.

Right now, refiners are enjoying a profitable period, yes. But they are not gouging. To suggest that . . . is to suggest that our economic system isn’t appropriate. If any particular competitor out there were not to [raise prices], they would run out of product.

Gasoline is a commodity. It goes up, and it goes down. And whoever is holding the inventory when it goes down loses money, and whoever is holding the inventory when it goes up makes money.

Q. When Arco raised its prices in April, it sent a notice to its dealers attributing the increase to the cost of producing CARB reformulated gasoline, a position that it has backed off of.

A. That notice has created a lot of [trouble] for us. First of all, it was really intended to just try to help the dealers understand what was going on. It was not intended to be a public notice.

We’ve since sent out a clarifying [notice] . . . because of the notoriety it received beyond any of our expectations. It was not meant to suggest that the blame for any changes in prices was the CARB program.

Q. It was not a disingenuous way for Arco to raise its prices?

A. Absolutely not. When we make price changes, we make price changes because of what’s going on in the competitive environment.

Q. You talk about constraints on supply as precipitating some of the need to raise prices. Now the production of gasoline is moving up much closer to the average daily consumption . . . yet prices have continued to go up. Why aren’t they going down?

A. In the last few days, I have not noticed in the area that I live that prices have changed much. So my sense is . . . that [prices] seem to have stabilized.

Q. Would you say that the perception of tight supply is actually greater than the imbalance itself?

A. Yes.

What I think will help the market is . . . some period of time where the production of gasoline is equivalent or greater than the demand for it.

Q. The reality of demand at the retail level is that demand has not changed significantly year over year.

A. That’s correct.

Q. And people have said repeatedly that there are no shortages. There may be low inventories . . . but in fact, there are no shortages of product.

A. I would agree with that. But we do have a whole new set of factors affecting the industry, and it takes time for the market to gain confidence in the industry’s ability to manage these sets of constraints.

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Back to the Future?

This month’s surge in California gasoline prices, when adjusted for inflation, doesn’t look so bad in historical terms. But the direction is worrisome. In 1973 dollars, the current average pump price of $1.53 a gallon is equivalent to the prices that prevailed in the mid-1970s, after the 1973 Arab oil embargo but before the 1979 Iranian revolution. Per gallon prices adjusted for inflation:

1996: $1.396*

* $1.53 per gallon price adjusted for inflation.

Source: Energy Department