The airwaves and the web this morning are full of stories bemoaning the return of $3.00-a-gallon gasoline in much of California, 50 cents above the national average and nearly 45 cents above last year’s California price. Yet as usual there’s little questioning of the oil industry’s excuses: rising oil prices, more demand, refinery maintenance and “the switch to a summer gasoline formula.”
It is obviously tempting for the news media to accept the plausible-sounding and easily packaged sound bites of industry analysts and spokesmen. The result, however, is that oil companies and their refineries are allowed to portray themselves as helpless giants, slaves to market forces beyond their control. Yet it is the oil companies’ own decision to curtail supplies of gasoline on hand in California that drives up prices faster and higher than in the rest of the nation.
California has fewer refining companies than other regions and virtually no competition in the wholesale gasoline market, meaning refiners know they can raise prices without competitors driving the price back down. From an unfettered business standpoint, it’s always better to make more money selling less product, so the state’s refiners act in concert on pricing even if they don’t collude in the legal sense of the word. The result for oil companies and refiners has been billions of dollars in year-over-year profit records.
As the spokesman for the Western States Petroleum Association, Joe Sparano, stated to the Los Angeles Times last year, "Why would anyone keep inventories higher than they need to be if they can operate smoothly and efficiently with what they have?" Tight supplies may be what the oil companies “need,” but consumers pay the price at the pump.
Here are more reasons why the companies’ excuses don’t account for $3.00 gasoline in California in March:
1. Oil prices in the last few weeks have been roughly what they were at this period last year –$60-$61 a barrel–yet gasoline prices in California are, according to the daily AAA report, more than 44cents a gallon above last year for regular. Even if oil prices are a little higher, each $1 rise in the spot price of crude oil should cause no more than a 2 to 3-cent rise in a gallon of gasoline. The spot price benchmark is itself deceptive, since major oil producers pay only a fraction of the spot price per barrel for crude oil they extract themselves.
2. At the same time last year, refineries were also switching over to their clean-air “summer formula.”
3. At the same time last year, refineries would also have been doing the routine maintenance they cite today.
Bottom line: The next time you hear or read the oil companies’ stock excuses for gasoline prices as they spike to new records, you’d be right to believe you’re not getting the whole story.