Facts of Gas Pricing Are Anyone’s Guess

It has been well said of Conrad’s novels that the deeper one reads into them, the murkier they become. I had the same sensation last week when, inspired by a press release from Atty. Gen. Bill Lockyer, I decided to delve into the question of why California gasoline prices are so outrageously high.

Lockyer’s statement, which arrived with a packet of pertinent charts and graphs, insinuated that California’s refineries systematically gouged motorists because their profit margins soared by almost 152% over the first three months of the year, during the pre-Iraq war run-up in gas prices.

It was plain from the statement’s wording that Lockyer wishes he could accuse the refineries of gouging outright. But his hand was stayed by the lack of clear information, and he contented himself with saying, carefully, that the refiners’ price markups “raise legitimate questions” about whether there’s gouging going on.

At the same time, he took pains to say he hadn’t uncovered any illegal activity by the gasoline industry, which would have obligated him to take action beyond issuing a press release. Instead, he called for various regulatory and legislative initiatives to ease the California gasoline crunch, most of which have been on the table for years.

The Democratic attorney general’s broadside had the virtue of playing to current events. It’s not only that the surge in local gas prices over the last few weeks paralleled the price spike in March. There’s also a recall election on, and the leading Democratic candidate for governor, Cruz Bustamante, has been calling for gasoline industry regulation -- a plank that is such a reliable crowd pleaser that I believe it’s known as “the candidate’s friend.”

My own journey in the heart of darkness of the gasoline market, which involved conversations with refinery groups, government agencies and an independent expert, suggests that there are three elements of the gas-price debate on which all sides agree. One is that Californians are in for a long period of volatile gas supplies and prices that will tend to stay higher than those in the rest of the country.

Another is that the major oil companies and independent refiners did generate relatively fat profits in March, and probably this summer too.

They admit as much. ChevronTexaco Corp., one of California’s biggest suppliers, says its refining revenue rose by about 40% in the first half of 2003 over the same period a year ago, and attributed some of its financial improvement to a “recovery” in profit from its West Coast operations. But it and other companies are also quick to say that prices and profits had been especially depressed a year earlier, thanks to the lousy economy and the post-9/11 hangover.

The third element is that no one in government knows who is really cashing in -- political grandstanding notwithstanding.

Some of the price increases experienced at the pump in March and this summer come from spikes in crude oil prices. Some result from refinery repairs and accidents, which cut output and tighten supplies. Some may be exacted as profit by the corner gas station, and some by refinery management.

But none of the agencies charged with overseeing this industry agree on how much of this profit is exorbitant, if any, or even on how to calculate it. Not long after Lockyer issued his statement, it was sniped at not only by the refinery industry but by the California Energy Commission, a state agency that has also been trying to nail down the facts on refinery margins.

“Lockyer’s using different numbers from ours,” Rob Schlichting, a commission spokesman, said. He hints that the commission believes Lockyer’s figures may be overblown, but stresses: “Nobody is saying that profits haven’t gone up; we don’t know by how much.”

Part of the problem is that gas prices can be crunched in a seemingly infinite number of ways, and the direction you point your finger has a lot to do with how you measure things at various points in the continuum.

There are, for example, at least four price categories for wholesale refined gasoline. These are the “rack” price, which is a standard charged at the refinery spigot; the “dealer tank wagon,” or “DTW,” price, which is what a service station pays to the tanker truck upon delivery, and which includes transportation costs and often a further refinery markup; a “bulk” price charged for large deliveries, such as to a pipeline; and a “spot” price, which is charged for deliveries not scheduled in advance.

These prices all fluctuate in relation to one another, depending on the time of year, conditions in the petroleum industry and a host of other factors. The U.S. Energy Department says, for example, that in March the California DTW price exceeded the rack price by 10 cents a gallon. That was almost double the differential in February but a complete reversal of the situation in March 2002 (a low-demand period, remember), when it was lower than the rack price by 2 cents.

Because different pockets get filled depending on the relative rise and fall of these prices, a politician or regulator can blame any group in the oil economy for profiteering depending on which price is selected to make the point.

For example, Lockyer relied on the spot price to calculate refinery “gouging,” but his critics say that would tend to inflate the perception of refinery profits in periods when supplies are tight and the spot price soars.

By the same token, the energy commission in March observed that rack prices had fallen, but not retail prices, leading it to denounce retail dealers for pocketing the difference. Irate dealers bombarded the commission with invoices showing that the oil companies were charging them DTW prices much higher than the rack rate -- which suggested they were being squeezed themselves.

In any case, the backdrop to all these fluctuations is a gasoline-pricing problem that is historical, geographic, political and economic. While living in a state in which the growth rate in gasoline demand has outstripped that in refinery capacity, Californians have also made decisions that favor certain interests (cleaner air, the right to drive gas-guzzling Schwarzenhummers) over others (easy construction of new refineries and consequently more stable gasoline prices).

Consider just one of these decisions: the mandate for clean-burning gasoline formulations, which lessens air pollution.

Although it’s well-known that California’s requirement for a unique gas formulation -- and one that’s different in summer and winter -- tends to add to the price at the pump, few people understand how. It’s not merely that California-grade gas is more expensive to make. During the seasonal changeover, refiners have to build stocks of one grade while selling down the other, a maneuver that inevitably crimps overall supply for a time. If there are other forces spiking gas prices while this is going on -- an impending war, a pipeline rupture, a refinery fire -- the price effect is magnified.

This question of “boutique” fuels is a complex one that doesn’t affect California alone; several parts of the country mandate special formulations, and refiners tend to be of two minds on whether this is good or bad for their business.

Generally speaking, according to a recent Rand Corp. report, refiners inside a boutique market like the rules, and those located outside the zone detest them. An outside refinery can’t sell ordinary fuel to the boutique market but has to decide whether to manufacture the special formula, and how much. The rules thus raise the barriers to entering the market, helping secure the insiders’ grip.

This phenomenon is especially germane to California, where seven companies control 95% of the in-state refining capacity, and where distance and geography alone make it hard for outsiders to ship gas in.

But that also undermines one of Lockyer’s prescriptions for solving the gas crunch -- namely, to take “steps to more cheaply and quickly import refined gas.” Industry experts say those steps can’t, in fact, be cheap or quick. As noted, California’s unique recipe presents a strategic challenge for exporters. In addition, the state does not have enough port capacity right now to bring in an appreciably larger quantity of gasoline from overseas.

What else might ease the crunch?

A gasoline pipeline from Texas to Phoenix would relieve California refineries of the need to send gas over the border to Arizona, leaving more for us, but such a decision is out of Sacramento’s hands. Or we might build more refineries; the state’s youngest was erected in 1969. Yet given the population density here and everyone’s hostility to neighbors who foul the air, one shouldn’t count on a crash refinery construction program.

Or we could insist on stricter fuel-efficiency standards for California autos, a gas-saving regulation that is currently outside the state’s jurisdiction. Our leading Republican candidate for governor might consider spotlighting the wisdom of such a policy by publicly rolling one of his SUVs into the sea off Santa Barbara.

Or we could simply watch our political leaders “call for action,” as Lockyer did last week. Although in 2000 his own task force blamed “market conditions” and “long-standing structural problems” for much of the price crunch, this hasn’t kept him from hinting darkly that nefarious activity is afoot.

Maybe someday his widely touted “investigation” of gas prices, which has yet to turn up any wrongdoing in four years of work, will actually bear fruit. Then he can tell us not only that someone is gouging California, but who.

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Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at golden.state@latimes.com.