Gas Prices Soar on Shift in Retailer’s Strategy

California gasoline prices continued to spiral higher in the last week because of a shift in pricing strategy by a key retailer and swelling demand in advance of the summer driving season, gasoline market watchers said Monday.

The ominous price spike in the last several weeks hints at another summer of costly car trips with a few prognosticators looking for gasoline to hit $3 a gallon or more.

Summer blackouts could complicate the picture by putting fuel pipelines and terminals--and electronic pumps at gasoline stations--out of commission intermittently.

Higher costs for key gasoline components and a switch to more expensive summer gasoline blends also are pushing pump prices up in California and across the country.

“There are a lot of pieces to this puzzle,” said Mary Welge, a senior editor with the Oil Price Information Service, which tracks gasoline prices for clients, including AAA, the automobile association.

Gasoline prices probably will rise even more because of a fire late Monday at a Carson refinery operated by Tosco Corp.

The amount of damage to the gasoline “coker” unit that caught fire was unknown, but gasoline traders usually bid prices higher immediately after an accident in anticipation of tighter supplies.

The unit is where petroleum coke--a type of coal--is burned in the process of making gasoline, said Tosco spokesman Andy Perez. It has a capacity of 125,000 barrels a day.

Average gasoline prices nationwide are generally lower than those in California, where air-quality regulations mandate a special blend of super-clean gasoline that is produced primarily within the state.

But, for once, gasoline prices have risen more slowly in California than in the rest of the country largely because of out-of-state refinery problems.

Nevertheless, prices here are well above those of a year ago--and not far off the California record of $1.847 set Sept. 11, not accounting for inflation.

The average price of self-serve regular gasoline in California increased 3 cents to $1.828 a gallon while the U.S. average jumped nearly 5 cents to $1.619, according to a weekly survey of filling stations conducted by the Energy Information Administration, a research arm of the U.S. Energy Department.

The California average rose 14.5 cents a gallon during the last five weeks, and the U.S. average leaped 21.5 cents a gallon. A year ago, the California average was $1.696 a gallon and the U.S. average was $1.48.

Refineries in California “are cranking,” producing the costlier gasoline required in summer months to fight that season’s air pollution problems, said Rob Schlichting, a spokesman for the California Energy Commission.

“There are no major refinery problems” in California, he said Monday before the refinery fire in Carson. “They’re pretty much at full production.”

The high price of natural gas, which is used to make methyl tertiary butyl ether, or MTBE, has driven up the cost and reduced the supply of the air-pollution-fighting additive, Schlichting said. In addition, gasoline demand already is increasing heading into summer, he said.

Also driving the increase is a recent decision by Tosco to tie the wholesale price it charges its dealers in Southern California and Arizona to the spot market for gasoline--resulting in price hikes to the dealers since March 26 that range from 6 cents to 16 cents a gallon.

Tosco, which sells gasoline under the 76 and Circle K brands, said it has been making money on gasoline refining but losing it at the retail end.

Company representatives were unavailable to comment on the pricing strategy late Monday.

In the last week, some other major retailers have begun matching the Tosco increase, market experts said.

“This is a move by Tosco to maximize profits, and as a result they’re driving the market,” said Will Woods, executive director of the Automotive Trade Organizations of California, a Tustin-based trade group representing gasoline retailers.

Duane Bernard, who owns two 76 service stations in San Diego County, said sales volume plunged 30% at each of his stations after the price increase.

To soften the blow, Tosco has frozen rents, lowered credit card fees and eliminated the requirement that dealers stay open 24 hours, he said.

“This type of pricing by oil companies squeezes dealers out of the business, and they take them over and the stations become company-operated and they make more money,” Bernard said. “There is no question that [Tosco] is boot-strapping the market, pulling the whole market up, and it has nothing to do with supply and demand.”

How expensive will gasoline get this summer in California?

It depends on how well refineries fare during rolling blackouts--most have generators that can keep gasoline production going if the refineries have sufficient notice of impeding outages--and whether they can avoid the sort of equipment problems that caused prices to spike in 1999.

“It could get really ugly,” said Philip K. Verleger Jr., a Newport Beach-based energy economist.

At best, most major cities may see prices topping out at $2.50 a gallon, with $3.50 seen in outlying areas, Verleger said. “If some refineries go down unexpectedly, we could see $5 gasoline,” he said.