'We Live on a Gasoline Island'

With California's closed fuel market, spikes hit independent stations hardest

LOS ANGELES -- For nearly two decades, Santosh Arya has pumped some of the San Diego area's cheapest gasoline at his three Homeland Petroleum stations. But early this month. wholesale prices started rising sharply, then shot up 40 cents a gallon overnight. To break even, Arya calculated he would have to sell a gallon of regular at $5.10--almost $1 higher than at nearby Shell and 76 stations. Instead, he shut down and waited for prices to drop.

"I've never seen anything like it," Arya, who said he lost $2,000 a day while hanging "out of gas" signs on his pumps, told The Los Angeles Times.

He has since reopened his stations in Vista, San Diego and Mira Mesa, but has struggled to keep his prices under $4.50 a gallon.

For the week that ended Oct. 8, when the average price for a gallon of gasoline in California hit a record high of $4.67, refiners' margins rose to $1.22 a gallon, said the report, up 75% from the previous week and nearly triple the average margin of 42 cents a gallon this year, according to the newspaper, citing California Energy Commission data.

The price run sparked protests and calls for investigations. But it isn't a conspiracy, it's economics. Oil companies, said the report, operate what amounts to a legal oligopoly in California--an arrangement that could contribute to more gasoline price spikes.

The state's gasoline market is essentially closed, the report said. Its strict clean-air rules mandate a specially formulated blend used nowhere else. All 14.6 billion gallons of gasoline sold in California last year were made by nine companies that own the state's refineries. Three--Chevron, Tesoro and BP--control 54% of the state's refining capacity.

"We live on a gasoline island," Gordon Schremp, a fuels analyst at the California Energy Commission, told the Times. "The control refiners have is an artifact of the closed marketplace we've created."

The lack of competition is also reflected at the retail level, said the report. About 85% of California's stations sell branded gasoline such as Chevron, Arco, Valero or Mobil. Pump prices at these outlets are directly or indirectly controlled by refiners.

In other states, such as Texas, independent, non-branded stations make up as much as 50% of the market, creating more competition. But California's independent stations are the first to suffer when there's a hiccup in the state's fragile supply chain, the report said.

In the case of an outage, refiners scramble to supply their own stations first. Independents have to rely on the volatile spot market to fill their underground tanks. California Energy Commission data shows that independent retailers and distributors lost, on average, 10 cents for every gallon sold in the days leading up to the price spike this month.

The state's fuel problems are magnified, critics say, because refiners have consolidated over the years, giving fewer players more market power. But the Federal Trade Commission and California's attorney general have investigated this market several times, never finding evidence of collusion or price fixing.

Refiners contend that the price of gasoline reflects the higher cost of doing business in California. It costs as much as 15 cents a gallon more to refine the state's clean fuel blend, and green regulations chip away at the bottom line. Fuel taxes, too, are higher than in many other regions.

"It's a very difficult, challenging market," Tupper Hull, spokesperson for the Western States Petroleum Association, whose members include most of the region's oil companies and refiners, told the paper. In August, the group released a report predicting that state rules to limit greenhouse gas emissions and push alterative fuels could force as many as eight of California's refineries to close in coming years.

As the number of refineries shrinks, the chances that an outage could create disruptive shortages and painful price hikes increases.

"The fragility of the refining system makes California really vulnerable to spikes," Carl Larry, president of consulting firm Oil Outlooks & Opinions, told the paper.

October's spike was triggered by two unplanned outages in the state. In August, Chevron's Richmond refinery caught fire, putting the plant partially offline for months. Then on Oct. 1, Exxon Mobil's refinery in Torrance lost power and went out of service for the better part of a week.

The market was already stretched perilously thin, said the report. Refiners always try to keep supplies tight, but they're particularly conservative before the semiannual switch between summer and winter gasoline, so as not to get stuck with inventory they can't sell. Chevron had also closed a pipeline for repairs, and ConocoPhillips announced planned maintenance on two in-state refineries.

"This was building up," Denton Cinquegrana, executive editor of the Oil Price Information Service, told the Times. "You could almost see it coming."

Exxon Mobil's shutdown sent traders into a panic as distributors scrambled to secure fuel. In just two days, wholesale prices leaped nearly a dollar in some places. Tesoro and Valero stopped selling to independent distributors in order to meet contractual obligations to stations such as SuperValu and Shell. That forced retailers including Costco to shut down their pumps and drove up street prices 12% in a week.

On Oct. 7, Governor Jerry Brown took the highly unusual step of allowing refiners to begin selling winter formulation gasoline ahead of the Nov. 1 switch to boost supply.

Gasoline prices have since fallen. On Sunday, a gallon of regular averaged $4.44 in California, according to AAA.

Nazhi Simaan, owner of SS Fuel in Paramount, doesn't know what to think.

Two days into the run-up, his station's underground tanks ran dry and he had to refill at fast-rising prices. Just to break even he charged $5.39 for regular. Customers balked. He went from selling as many as 2,000 gallons of fuel a day to barely 100.

"We couldn't even pay the employees," Simaan told the paper. "Why did this happen?"