Changes in Gas Market Pushed

California Atty. Gen. Bill Lockyer on Monday urged legislators to blunt gasoline price increases by creating a fuel reserve, tapping new pipelines or taking other steps that could lead to a more competitive market.

The pressure from the state’s top law enforcement official came on the heels of the second major run-up in California gasoline prices this year, and as Lockyer’s office released a report suggesting that oil refiners are pocketing big profits.

“The fact is that our market’s over-concentrated, we’re all paying too much, and we ought to figure out ways to enhance supply and increase competition,” Lockyer said.

The report issued Monday concluded that California oil refiners’ margins increased 152% between January and March, “with virtually all of the rise representing profit.” The price of a gallon of self-serve regular gasoline rose 36% over the same period, hitting a record statewide average of $2.15 on March 17.

A trade group representing refiners, the Western States Petroleum Assn., questioned the report’s methodology. For example, it calculated refinery margins using spot prices for gasoline, which often exceed wholesale prices.

The association said the increase at the pump had its roots in a shortage of refining capacity and higher crude oil prices.

“The attorney general’s conclusions contradict those of previous investigations this year as to the causes of market volatility during the period in question,” said Jeff Wilson, spokesman for the association. “The California Energy Commission reported that the causes were strictly market-based, as did the Energy Information Administration.”

The California Energy Commission’s March report laid the blame for high prices on various market conditions. It added: “The possibility exists, nevertheless, that one or more re- fineries could manipulate retail prices by withholding gasoline.”

Lockyer conceded Monday that his own investigation into possible price manipulation by oil companies was on the back burner. The real problem, he said, is that seven companies control more than 95% of the state’s refining capacity and that few out-of-state refineries are capable of producing California’s ultra-clean-burning fuel.

“When you have so few market players,” he said, “you don’t have to fix prices.”

There is widespread agreement among regulators, industry experts, Wall Street analysts and others that California is the refining industry’s most profitable market, and analysts are expecting 2003 refining profits to be especially high for the oil companies with plants in the state.

Lockyer called on state lawmakers to pass legislation addressing some of what he said were the market’s ills. A strategic gasoline reserve, he argued, would help by providing a backup supply of fuel in the event of refinery disruptions or supply shortages, which push up retail prices.

Lockyer also suggested finding ways to bring more gasoline into the state through pipelines linking Los Angeles and the Texas Gulf Coast, a center of gasoline production.

But the California Energy Commission has already studied -- and rejected -- several such proposals.

State energy commissioners said no to a proposal to build a new pipeline to connect California directly to the Gulf Coast refineries, saying it would be too expensive and potentially unhelpful. In addition, the commission cast doubt on a plan that would use existing pipelines, along with the new 700-mile Longhorn line between El Paso and Houston, to route fuel to California.

The Longhorn pipeline, expected to go into service soon, will carry fuel to El Paso, where it will connect to pipelines flowing to Tucson and Phoenix. Lockyer has suggested that gasoline refined in Houston could then be sent on to California using a pipeline operated by Kinder Morgan that moves gasoline from Los Angeles to Phoenix.

“What we concluded was that the refineries in Texas would not have sufficient excess product of the quality that California needs to make the pipeline feasible,” said Pat Perez, the state commission’s fuels manager.

It’s unclear how the state would force fuel to flow from Texas to California. The existing pipelines are privately owned, operated and paid for, and building a new pipeline would cost an estimated $1.5 million a mile.

For its part, Kinder Morgan has little interest in reversing the flow of gasoline between Arizona and Southern California.

“We operate our pipeline based on the needs of our customers,” which want to move product from Los Angeles to Phoenix, company spokesman Larry Pierce said.

State regulators also shot down the strategic fuel reserve proposal, citing the potential for creating unintended consequences, such as discouraging private companies from increasing storage capacity, Perez said.

California pump prices hit an average of $2.101 for a gallon of self-serve regular on Aug. 25 before leveling off last week.