Gas Prices Show Signs of Decline as Production Surges

The long, steep run-up in California gasoline prices appeared to break this week as the average pump price dipped half a penny to $1.54 a gallon, and state energy officials predicted Wednesday that the decline will continue.

Experts said the dip--recorded in state and federal surveys reviewed by The Times--was preceded by a five-cent decline in wholesale prices. That, in turn, was triggered by a 23% jump in gasoline production at the state’s refineries. Officials said the peak probably occurred last week, more than three months after the surge began.

“The refineries are operating with the pedal to the metal,” said Charles Imbrecht, chairman of the California Energy Commission. “Contingent on refineries continuing to operate effectively with restoration of capacity, I would be surprised if we don’t see reductions [in gas prices] over the next two weeks.”

If it continues, the stepped-up production will bring prices down further as supply rises to meet demand, replenishing gasoline marketers’ depleted inventories and easing the imbalance that worked to boost prices. Crude oil prices have also eased significantly in recent weeks.

Reports of the gas price decreases have varied from region to region, ranging from several cents a gallon at some stations in the Sacramento area to smaller drops in San Diego County.

“I’ve noticed it definitely,” said middle school English teacher Kenneth Rowe as he gassed up at a Chevron station in downtown San Diego. “It’s $1.57 this week, a two-cent drop from last week. I’m a beggar so I can’t be a chooser, so it’s better than nothing. But I’ve resigned myself to gas being more expensive.”

The decline may be slow and could be reversed by any further snags in the fuel delivery system. The state’s refining capacity is so close to normal demand that any refinery problems such as those that contributed to the latest surge could send prices higher once again, particularly with the vacation driving season on the way.

Indeed, the recent gasoline crunch and price spike have put the spotlight on California’s inelastic gasoline supply, a dire strait that caused one refiner to order two tanker loads of gasoline from as far away as Finland last month. Gasoline is also being shipped in from refineries along the Gulf of Mexico.

“Prices are headed down, that’s exactly right,” said Michael Mayer, an oil analyst with Wertheim Schroder in Burlingame, Calif.. “But the probability that gasoline prices will be more volatile than [in] the rest of the country is high.

“California has its own unique fuel and . . . our own little market. That market is roughly in balance when everything is right but when things don’t come [out] right, such as refinery accidents, supplies are tight and prices are going to go up,” Mayer said.

Moreover, dealers will be reluctant to lower prices quickly because they generally were not able to raise pump prices as fast as their own costs climbed, and will want to exploit lower wholesale costs to recapture lost profits, Imbrecht said.

The average price statewide of unleaded regular self-serve gas of $1.54 per gallon compared with $1.543 on Tuesday and $1.545 on Monday after the first decreases since early February, according to data gathered by the U.S. Energy Information Administration.

The Monday price was unchanged from the previous Friday and marked the first day that prices had done anything but go up since the gas crunch began, the Energy Commission said. Even more encouraging is that average statewide wholesale or “rack” prices--what dealers pay--have been trending down since April 29, from $1.02 to 97.25 cents a gallon.

Spokeswoman Jan Speelman of the Automotive Trade Organizations of California, a group representing service station owners, agreed that prices will not fall nearly as quickly or as dramatically as they rose. But she blamed the refiners, who she said will be reluctant to cut wholesale prices because they have “conditioned the public to pay these higher prices.”

Though most experts have blamed a convergence of outside forces for the price run-up, refiners have taken the brunt of the criticism in California. Evidence showed their margins more than doubled in April. But their current overproduction--as much as 40% above normal capacity in some cases--should inevitably bring prices down.

In any event, industry observers say the conditions are right for a settling of prices, mainly because gasoline inventories and refinery capacities are approaching pre-crunch levels. Aggregate production at the state’s refineries is now 913,000 barrels of gasoline a day, a 23% jump in daily production from the 740,000 barrels produced in the depths of the gasoline shortage in early April, Imbrecht said.

Daily gasoline demand in California is 885,000 barrels a day.

It was an April 1 fire at a Shell plant in Martinez and a mid-March blaze at Arco’s Los Angeles refinery, on top of higher world crude prices, that helped precipitate the 30% gasoline price spike in California. The Shell refinery plant alone resulted in a temporary loss of 7% of the state’s refining capacity. The Arco plant is back on line but the Shell refinery won’t be fully operational until early June.

Also contributing to the tight supply was a state law going into full effect June 1 that mandates production of cleaner-burning gasoline. That required about $4.5 billion in modifications to state refineries, some of which had production problems during the changeover.

At least six major refinery owners in California decided it wasn’t worth the expense and stopped making gasoline. As a result, the state’s refineries now can churn out a daily average of only 906,000 barrels, a cushion of just 2% over the average daily demand. As recently as 1990, refining capacity provided a 15% cushion above average daily demand.

* POLITICAL OIL FIELD: Problems in tapping Strategic Petroleum Reserve. D1

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Price Drop

California gasoline prices fell half a penny between Monday and Wednesday, the first decline after a three-month run-up. Statewide average prices for self-serve unleaded regular.

May

Monday: $1.545

Wednesday: $1.540

Source: U.S. Energy Information Administration

Researched by JENNIFER OLDHAM / Los Angeles Times