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California gas-price gap with rest of U.S. grows

Sacramento Bee
California gasoline prices have risen faster than the national average, the result of refinery shortages and revised fuel recipes that force California to bid against other states for precious supplies.

Higher taxes and a stricter clean-fuel formula mean California's gas prices are almost always higher than the U.S. average, usually by about 20 cents to 25 cents a gallon. But as of Tuesday Californians were paying 45 cents more -- a record $3.38 a gallon for self-serve regular, according to AAA.

The U.S. average was $2.93.

As recently as early January, California's prices were actually even with the U.S. average, a legacy of the freakish, post-Hurricane Katrina market conditions that sent prices shooting sky-high in much of the East.

Now the spread between California and the rest of the nation is the highest it's been in three years. The U.S. average has bounced around the $2.90 mark in recent weeks while the California average has continued to move up, although AAA said Tuesday that it appears that California prices are leveling off.

"We didn't flatten out when the rest of the country did," said Claudia Chandler, spokeswoman for the California Energy Commission. The increase has come even as some California refiners export a portion of their output to neighboring states.

Attorney General Bill Lockyer has issued subpoenas to every California refinery for evidence of "profiteering and gouging." The Foundation for Taxpayer and Consumer Rights, a watchdog group based in Santa Monica, accused California refiners of "artificially withholding supply through tactics that would be the envy of Enron."

But industry officials say they're doing nothing wrong. Prices are shooting up because of "tightness between supply and demand in California," said Joe Sparano, president of the Western States Petroleum Association.

Chandler said several refiners are experiencing production problems -- some because they're still finishing their annual spring overhauls and a couple because of unplanned glitches.

During the week ending May 5, the latest figures available from the state Energy Commission, production of gasoline at California refineries was 1.8 percent lower than a year ago.

Chandler wouldn't identify the struggling plants, but industry consultant David Hackett said the Exxon Mobil Corp. in Torrance is still laboring to regroup from a February fire. Company spokeswoman Laura Paredes said "things are back to normal."

Yet while statewide refinery production is down, output of gas blended for export to neighboring states is actually up 6.7 percent, according to the Energy Commission.

The consumer rights foundation said that's evidence that refiners are purposely holding down supply for California in order to drive up prices.

Hackett, however, offered a less sinister explanation: Because it's tougher to make gas to California's clean-air standards, it's natural that refiners struggling with production problems would shift more of their output to easier-to-blend gas for neighboring states.

"They can't make the California flavor; they can make the Nevada flavor," said Hackett of Stillwater Associates in Irvine.

California's rising prices also are a function of the changing fuel recipes in East Coast markets and California's ever-increasing reliance on gas shipped from other states and countries, he said.

While its refiners do make some gas for neighboring states, California is a net importer of gasoline. It will import an estimated 9 percent of its gas this year, and the amount grows every year, according to the Energy Commission.

Not only that, the competition is getting tougher. Much of the Northeast, including practically every major urban market from Massachusetts to Virginia, has adopted clean-air fuel specifications that are fairly close to California's, Hackett said.

"Other states are now requiring gas similar to us, and they're bidding it away from us," Hackett said.

Even though production at California refineries has slipped relatively little, inventories of "finished" gas have fallen more than 20 percent -- a sign that California is laboring to import the supplies it needs, he said.

The result is higher prices for imports. That, in turn, has enabled suppliers to raise the price of every gallon of gas sold in California.

Exacerbating the import issue, many of the refineries serving the Eastern United States are switching this spring from the fuel additive MTBE to ethanol, a move driven partly by fear of liability lawsuits over MTBE's effects on groundwater.

Hackett said the conversion to ethanol has been tougher than anticipated, driving up costs.

Eventually, California will benefit from other states' rollout of cleaner fuel specifications because it will prompt more refiners around the world to routinely manufacture gasoline that approximates California's formula, said economist Severin Borenstein of the University of California Energy Institute.

For years California has suffered because it uses a "boutique" recipe that's more stringent than anywhere else in the world.

Only a handful of refiners outside the state make gas that can be used in California, which tends to worsen the price spikes that occur when California refiners suffer production problems.

Now that other states are using similar formulas, the problem should ease.

"It's definitely good news in the longer run when we get more standardization," Borenstein said. "The best news would be if the whole United States adopted our formula."
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At the pump Average price Tuesday of a gallon of self-serve regular gasoline:

U.S. $2.93
California $3.38*
Sacramento $3.27*
Chico $3.29*
San Francisco $3.36
Redding $3.35*
Modesto $3.25
Yolo Co. $3.27
Santa Barbara $3.49*
Los Angeles $3.40

* Denotes record
Source: AAA

High-priced fuel The average price of a gallon of self-serve regular gasoline in California has moved sharply higher than the U.S. average:

Date / U.S. Average / CA Average
1/3/05 / $1.78 / $1.98
5/26/06 / $2.93 / $3.38

Source: U.S. Department of Energy
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The Bee's Dale Kasler can be reached at (916) 321-1066 or dkasler@sacbee.com