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Group Has Answer for Gas-Price Volatility;

Energy: Restricting sales to a single grade could free up space for reserves to cushion against spikes.The Los Angeles Times

A consumer group in Santa Monica is proposing a novel solution to chronic gasoline price spikes in California: sell only regular gasoline.

Stations lacking premium and mid-grade gasolines probably would draw protests from owners of luxury vehicles and clunkers alike who need the extra octane to keep their cars moving.

But going to a single grade with an octane rating of 87 or 88 would free up storage space that the state could employ as a publicly owned strategic fuel reserve to cushion against higher prices, according to a study to be released today by the Foundation for Taxpayer and Consumer Rights. (Click here to read the report and the exhibits.)

The study, conducted for the group by a gasoline industry consultant, accused refiners of keeping fuel prices high in the relatively isolated California market by keeping inventories low. The companies use publicly available data to keep tabs on one another's refining levels, the report said, and the tactics do not violate antitrust laws.

"You don't need a smoke-filled room," said Jamie Court, FTCR's executive director. "All you have to do is follow the leader and you can control the market."

The study contends that California drivers last year would have saved 16 cents per gallon, or $2.8 billion, if such a reserve had existed. For those motorists whose vehicles require higher-octane gasoline, the study advises buying fuel additives.

FTCR's study points to inventories as a key problem in California's gasoline market, which is dominated by six large companies.

"All of those refiners know that if inventories go up too high, then the prices get too low and all of them know that if inventories get too low, they get gas lines," said Tim Hamilton, a consultant from Olympia, Wash., who spent two years on the FTCR report.

Hamilton and Court were members of California Atty. Gen. Bill Lockyer's gasoline task force in 2000. It recommended creating a strategic fuel reserve to cushion against price spikes or the construction of pipelines to bring gasoline into California.

The advocacy group is calling on the state Legislature to come up with a law mandating a single fuel grade and setting up the strategic reserve.

California's motorists already are required to use the nation's cleanest-burning gasoline, and the fuel is produced by few refineries outside the state.

About 25% of retail fuel purchases last year were of mid-grade and premium gasoline, according to statistics from the federal Energy Information Administration. Hamilton, however, contends that 95% to 97% of cars can operate correctly on a lower octane fuel, based on a study conducted by AAA.

Hamilton estimates that 50% of the storage space devoted to premium gas is not effectively used, and eliminating the higher grades would create instant storage space at gasoline stations and fuel terminals for a state-run strategic fuel reserve that could be tapped when prices soar.

But Steve Mazor, chief auto engineer for the Automobile Club of Southern California, thinks the consumer group's plan is a bad one. Drivers who require higher-octane fuels would not only be inconvenienced by having to purchase bottle after bottle of fuel additives, their safety also could be threatened by carrying the volatile additives in their cars, he said.

"You're talking 2 1/2 million people with a potential bomb in their trunks," said Mazor, who noted that the effectiveness of some gasoline additives has been questioned.

John Felmy, chief economist with the American Petroleum Institute, said a government reserve could worsen inventory levels if oil refiners saw less need to hold costly reserves.

"You could see government reserves crowding out the private reserves," Felmy said.

Felmy also disputed the group's allegations that oil companies are manipulating inventories to keep prices high, saying that supply, demand and competition dictate prices.

"The oil industry has been the subject of dozens of investigations over the years, and they all have exonerated us," Felmy said.

The octane number represents the anti-knock properties of gasoline.

Older and higher-performance cars typically use higher-octane fuels to prevent the engine from knocking, or "pinging."

The study's release came as Southern Californians were getting a firsthand look at oil economics in action: Wholesale gasoline prices have jumped since Friday because a fire at the BP refinery in Carson shut down two coker units, which process fuel oil, a byproduct of the gasoline refining process, into coke.

Prices on the street already are reacting and could rise 4 cents to 10 cents per gallon at the pump, said Bob Van Der Valk, bulk fuels manager at Cosby Oil Co. of Santa Fe Springs, an independent fuel distributor.

Wholesale gasoline prices ended Tuesday at 89.5 cents per gallon in Los Angeles, he said. Taxes add 48 cents to the wholesale price.

"On Thursday and Friday, everyone will be going out to buy gasoline, and they're going to wonder what happened," Van Der Valk said.

Price increases probably will linger even after refinery repairs by BP, which owns the Arco and Thrifty brands, because of the annual changeover of production to winter gasoline and stubbornly high oil prices, he said.

BP spokesman Walter Neil said the coker units were not damaged, but the refinery's gasoline production has been temporarily reduced as a result.

Inventories in California are sufficient to meet demand, he said, attributing rising wholesale prices to market speculation.