State Could Face Gasoline Price Hikes
California consumers could see gasoline prices shoot as high as $4 a gallon next year if a U.S.-led war on Iraq disrupts the flow of Middle East oil at the same time the state introduces a new environmental regulation that is likely to create supply problems, some energy experts warn.
Though many analysts strongly disagree that things are so dire for consumers, West Coast traders are bracing for problems in January when California begins phasing out gasoline containing methyl tertiary butyl ether, or MTBE. The controversial additive has been banned because of environmental concerns. The state, meanwhile, is shifting to gasoline made with ethanol, another clean-air additive.
The fragile situation could then get worse if the U.S. attacks Iraq because the West Coast’s reliance on imported petroleum leaves it “extremely vulnerable” to a global oil disruption, said Philip Verleger, an energy analyst with the Council on Foreign Relations in New York.
He is convinced that a war with Iraq at least for a time could push crude oil prices above $40 a barrel, up from about $25 now. And if that happened as ethanol-related supply troubles kicked in, Verleger contends, Californians could face a doubling of prices at the pump.
Such a scenario would not only depress an already shaky economy but also could spark a backlash against the U.S. effort to disarm Iraqi President Saddam Hussein, he warned.
“No one is thinking about this,” Verleger said after a presentation Saturday at the annual meeting of the Pacific Council on International Policy, a foreign policy organization based in Los Angeles. “We haven’t done anything to prepare for it.”
John Kingston, director of global oil for Platts, an energy information service, believes that California’s transition to ethanol will trigger gasoline shortages and steep price hikes regardless of what happens in the Middle East.
He predicts that producers outside of California will initially shy away from shifting to gasoline with ethanol because of the uncertain demand and higher costs of production and transportation. That could create reductions in supply and price hikes of as much as 30 cents a gallon a day in California by early spring, he said.
“Traders are not nonchalant about this,” Kingston said. “Think chaos.”
Others are skeptical, however, that the West Coast faces such a grave threat.
Amy Jaffe, a senior energy analyst at Rice University in Houston, said there are enough oil suppliers in Asia and Latin America to keep California refineries supplied if the Mideast oil supply is disrupted.
In a severe situation, Jaffe said, California officials could temporarily lift environmental restrictions that limit the types of gasoline drivers can use. And she believes that U.S. refineries will move relatively quickly to ethanol because the California market is too big to ignore.
“You may have to pay 50 cents more to get a barrel from Asia, but people in California already pay more for gasoline than elsewhere in the country because of your environmental restrictions,” Jaffe said. “Somebody’s not going to have to turn off a California refinery because there’s no oil.”
Crude oil prices, which jumped more than 40% earlier in the year, have dropped in recent weeks because of increased production by OPEC and progress in the United Nations’ campaign to disarm the Iraqi government. Oil prices fell a dollar a barrel last week after Hussein agreed to U.N. weapons inspections. West Texas Intermediate crude closed at $25.53 a barrel Friday, up 25 cents over the previous day.
Yet though gasoline prices have held steady or dropped recently in other parts of the country, they have risen here.
In California, the average price of a gallon of regular self-serve gasoline on Nov. 11 was $1.59, a 3-cent increase over the previous week, according to the Energy Department. The nationwide average was $1.44 a gallon, a 9-cent-per-gallon decrease from the previous week.
The West Coast’s dependence on imported oil and distance from key providers drastically increases the region’s economic vulnerability, according to Verleger.
During the first Gulf War, he noted, the region was an exporter of Alaskan oil, but a decline in production has changed that picture dramatically.
Today, the West Coast imports 1 out of 3 barrels of oil it consumes. Nearly 10% of those imports come from the Middle East, and about half of that is supplied by Iraq under the U.N.-administered oil-for-food program.
To add to the pressure, financially strapped West Coast energy companies have depleted their oil inventories, which are at half the level of 1990.
The West Coast also can’t depend on the U.S. government’s emergency cache of oil for a quick fix, according to Verleger. The Energy Department recently announced that its Strategic Petroleum Reserve had reached 592 million barrels, the highest level in the program’s 25-year history.
But getting that oil to the West Coast would be costly and time-consuming because it is stored in more than 50 underground caverns along the coast of Texas and Louisiana. The quickest way to California would be through the Panama Canal, but that is limited to smaller tankers because of the canal’s size.
And under the Jones Act, a 1920 federal law aimed at protecting domestic shippers, only U.S. flag carriers can deliver cargo between two U.S. ports. Verleger said there are only a few U.S.-flagged tankers, and they already are busy transporting oil from Alaska to the lower states.
Though OPEC countries have increased their output lately, most of the extra reserves are being held in the Caribbean and in tankers outside the Pacific because those areas are considered less vulnerable to attack.
As an insurance policy, Verleger suggests that West Coast officials strike a deal with Japan. In the event of an oil crisis, Japan, which currently has 180 days of reserves, could agree to use its emergency supply and allow crude oil headed for that country to be diverted to the West Coast.
Verleger pointed out that though the U.S. government has treated the country as an “economic whole” in devising its energy strategy, the “interests of the West Coast are more linked to the Pacific Rim than the East Coast.”
The U.S. defense secretary also can issue a temporary waiver of the Jones Act shipping restriction if national security is in danger. The last time the U.S. government granted a security waiver was during the 1990-91 Gulf War.
“This is all doable, but it shouldn’t be left until the last minute,” Verleger said.
California Energy Commission officials could not be reached Sunday for comment.
Rep. Jane Harman (D-Venice), a member of the House Energy and Commerce Committee, agrees that the West Coast energy supply could be endangered by war with Iraq or terrorism.
But she said local and state officials would have difficulty developing emergency response plans until the Bush administration provided a thorough assessment of the possible damage, from the oil well to the gas pump.
“We are vulnerable,” said Harman, the ranking Democrat on the House Subcommittee on Terrorism and Homeland Security. “Our energy supply is vulnerable.”
