Consumer Watchdog – Why Californians Are Paying Even More For Gas

Californians usually pay more for gasoline than do other Americans. But not this much more.

A gallon of regular now costs, on average, $3.14 in the Golden State. The national average is $2.54, according to the AAA auto club. That 60-cent difference is twice the norm.

California's gas prices typically hover 25 to 30 cents above the national average, the result of high state taxes and our use of pollution-fighting gasoline blends made by only a few refineries.

But this summer, prices in California kept climbing even as they fell in the rest of the country, and the gap grew wider.

Experts blame production cuts - some of them planned, some of them not - at the state's refineries. The isolated nature of California's gasoline market, served by a limited number of refineries, made the situation worse. And the state's gas taxes, which grow larger the higher the price climbs, didn't help.

"There was a point earlier in August when I think not one refinery was running well," said Denton Cinquegrana, who tracks West Coast gasoline markets for the Oil Price Information Service. "They were all having either planned maintenance work, or there was one nagging problem or another cutting production."

Gap Should Narrow

Like other analysts, he expects the difference between prices in California and the rest of the country to dwindle, now that most of the refinery problems are fixed. Production has started climbing again, rising 4.4 percent last week, according to the California Energy Commission. But the state's supply of California-grade gasoline remains 5 percent below its level at this time last year.

"The high prices we've been seeing in California in the last days and weeks are going to come down, and you'll see something closer to the national average," Cinquegrana said.

To understand why we pay more, even in the best of times, it is important to remember that gasoline isn't the same in every state.

In 1996, California started using its own unique fuel blends to combat air pollution in smog-prone cities. The plan worked, but with a serious, unintended consequence. No other state adopted California's fuel standards, so the state became a kind of energy island, its economy dependent on gasoline blends found nowhere else.

At the same time, the number of refineries in California was shrinking. In the 1980s and early 1990s, West Coast refineries were dealing with low profit margins, and smaller ones had been closing. More shut down rather than make the expensive upgrades to produce the new gas, upgrades that could cost as much as $400 million per refinery.

As a result, California came to rely on a limited number of refineries, most of them in the state. The special fuel blends also cost more to make than did regular gas. The current estimate is 5 to 15 cents more per gallon.

Flash forward to 2008. As the global economy staggered last fall, some refining companies started cutting the amount of gasoline they made nationwide, because drivers weren't buying as much fuel.

"The data I've seen show that for a very long time, supply and production were exceeding demand, and any business sooner or later will cut production," said Joe Sparano, president of the Western States Petroleum Association, an oil industry trade group.

The cuts continued through this summer. Then individual refineries throughout the state started running into unexpected problems that further limited production. In July, for example, Tesoro Corp.'s Golden Eagle refinery in Martinez had to shut down a key piece of equipment that took weeks to repair. Shell's Martinez refinery reportedly underwent unplanned repairs at roughly the same time.

'Out Of Whack'

"The key to this was the twin outages," said Brian Milne, refined fuels editor for the Telvent DTN business information service. "You had refineries already cutting back their run rates. When you're in that situation and then you have an unexpected problem, you can see things really get out of whack."

Consumer advocates say this summer's big disparity between prices in California and the rest of the nation shows the stranglehold refiners have on the Golden State's economy.

"We are a relative island in production of our gasoline formula, so it's easy to game," said Judy Dugan, research director for the Consumer Watchdog advocacy group. "You make a little less so you can charge more - like any product."

Sparano said the refiners had to cut production because of tumbling gasoline sales, which started stabilizing only this summer. A parade of politicians and bureaucrats has investigated the refining business over the years without proving illegal price manipulation.

"The notion that if somehow they had just kept going and storing stuff in tanks that couldn't hold any more, we'd be better off when they had unplanned outages - that's not the way a business works," Sparano said.

Finally, taxes also helped push California's gas prices far higher than the national average. According to the American Petroleum Institute, the oil industry's main lobbying group, Californians pay the highest gasoline taxes in the United States, when federal, state and local taxes are combined. And because sales taxes are calculated as a percentage of the overall sale price, they rise whenever the price does.

In January, Californians paid 50 cents in taxes on every gallon, according to the energy commission. Now it's 59 cents.

The Price Of Gas

     ·    In California:  $3.14
     ·    Nationwide:  $2.54
     ·    Prices are averages for a gallon of regular.

Source: AAA

E-mail David R. Baker at dbaker@sfchronicle.com.