A fuel reserve is one of several ideas proposed to curb large price swings when crude oil supplies run short or refineries falter.

Los Angeles Times

Should California put a little gasoline in the bank?

As motorists fume at record-high gasoline prices, which soared in advance of war in Iraq, California officials are studying proposals that could help blunt future price spikes and reduce the state’s growing dependence on petroleum.

One of the most ambitious options would create a “gasoline bank” that would act both as a reserve supply when refineries falter and as an independent cache of gasoline that could be auctioned daily, damping the major oil companies’ hold on California’s fuel supply.

Other proposals are aimed at reducing the state’s growing consumption of fossil fuels. Ideas include making driving more costly (think higher gas taxes and fees) and offering rebates and incentives for gas-sipping hybrid cars.

Crude oil prices could continue falling this week; on Friday, as the bombing in Baghdad intensified, crude closed at $26.91 a barrel on the New York Mercantile Exchange, down $1.21 on the day — and far off its $37.83 high reached two weeks ago.

But gasoline prices remain high — oil companies often take weeks to pass on lower crude prices — and California officials say the time is right to push for measures that may help shield motorists from soaring costs.

The California Energy Commission and the state Air Resources Board will lay out a package of energy-related recommendations at the end of next month.

The two agencies plan to present a final strategy to the state Legislature and Gov. Gray Davis in June.

“This is probably the most comprehensive work we’ve done on this issue in the modern era,” said Scott Matthews, the commission’s deputy director for transportation energy. “There’s a huge range of alternatives… Everything is on the table.”

The idea for a state strategic fuel reserve dates to the last gasoline squeeze in 1999, when refinery outages sent California gas prices soaring.

After an investigation into the causes, Atty. Gen. Bill Lockyer declared California’s oil and gasoline markets deeply flawed, hampered by anemic competition and unique characteristics that preclude outside aid when problems arise.

Contending that government has a role to play when market forces fail, Lockyer pressed for studies, including one exploring whether a strategic fuel reserve could help stabilize the gasoline market.

Many of the studies were completed in early 2002, though they received scant attention because by then gas prices were back to normal levels.

But the recent price run-up has given new relevance to the proposals. Lawmakers in Washington and Sacramento seem primed to consider bold moves.

“Gasoline is the fuel that drives California… Naturally, the governor wants to do all he can to prevent the roller-coaster ride in gas prices,” said Davis spokesman Steven Maviglio. “The governor will review recommendations from the commission and work with the Legislature on any needed changes in the law.”

This week, the commission and the state Public Utilities Commission will send Davis the results of their 15-day investigation into the state’s high gasoline prices, as well as lofty natural gas prices. Sen. Barbara Boxer (D-Calif.) asked the General Accounting Office to probe the gasoline situation this month, and last week, Rep. Bob Filner (D-San Diego) introduced legislation that immediately

would freeze gasoline prices nationwide and launch an investigation by the

secretary of Energy.

“This is the kind of issue that makes or breaks a politician,” said Jamie Court, executive director of the Santa Monica-based Foundation for Taxpayer and Consumer Rights. “Gas prices are being kept higher, in part, by the lack of solutions.”

The core problem is that the supply and demand remain so precariously balanced that changes in world crude oil supplies or even the tiniest of disruptions at a California refinery, port or pipeline can trigger wild price swings.

Several key limitations have gradually intensified California’s woes — and frustrated any attempts at quick fixes.

California’s rich fields make it the nation’s fourth-largest producer of crude oil, pumping out 800,000 barrels a day. And the state’s 16 refineries, after importing an additional 1.2 million barrels of crude, produce about 37 million gallons of gas a day. But that’s not enough to satisfy California consumers, who use more than 42 million gallons of gas every day.

What’s more, California’s strict clean-air regulations require refineries to make specially formulated gas for the state market. Because of that, when there’s a supply glitch, out-of-state refineries can’t send extra supplies without first retooling their plants, — delaying deliveries by four to eight weeks, regulators say.

“Nobody else in the world makes anything close to what is required here to meet air quality standards,” said David Hackett, president of Stillwater Associates, an Irvine-based consulting firm that has conducted studies for the energy commission.

The notion of a fuel reserve isn’t new. The nation has two government-sponsored reserves now: the Strategic Petroleum Reserve in Texas and Louisiana and the Northeast Home Heating Oil Reserve, created in 2000 to prevent shortages and egregious price spikes from causing cold-related deaths.

The Northeast heating oil reserve has 2 million barrels of the fuel — roughly a 10-day supply — stored at sites in New York, New Jersey, Connecticut and Rhode Island. It can be tapped when there is a so-called dislocation in the heating oil market or a regional supply shortage.

Until 1998, the federal government held a vast reserve of crude oil and natural gas near Bakersfield in the Elk Hills Naval Petroleum Reserve. Elk Hills was sold to Occidental Petroleum Corp. for $3.65 billion that year to help cut the deficit. But it wouldn’t have been a quick fix for California motorists in any case.

Unlike the federal strategic petroleum reserves in Gulf of Mexico states — where crude is kept in salt caverns and can be tapped immediately — the Elk Hills supply is in its natural state underground and must be pumped.

The state gas bank would operate far differently than existing government reserves.

Stillwater Associates, which studied the idea for California, has proposed a reserve consisting of 2.5 million barrels of gasoline — about a two- or three-day supply for the state — to be purchased over time and split between facilities in Los Angeles and San Francisco.

The state’s role would be to pay for the initial fill of fuel and then hire an outside firm to build and operate the gas bank. But unlike a pure reserve, the stockpile would be available for purchase through a daily auction, giving independent gasoline buyers an alternative to major refineries. It also would boost the state’s overall storage capacity.

Consultant Hackett said establishing the reserve could cost taxpayers up to $140 million, depending on the price of fuel, plus annual operating costs of as much as $30 million. But possible savings to consumers could outpace those costs.

Had a reserve been available during the 1999 price run-up, consumers could have saved $500 million over three months by curbing market volatility and keeping prices low, according to the consulting firm’s estimate.

Six refiners produce more than 90% of the state’s gasoline, own most of the storage space and control supplies for most of California’s retail gas stations.

When fuel runs short, independent gas stations often find themselves cut off. A gas bank would allow an independent company to buy fuel when supplies got tight.

Buyers would be required to take delivery of the gasoline they purchased. That would help discourage schemes in which buyers profit when prices fluctuate in a volatile market, which is what happened during California’s electricity crisis.

“There are some valid concerns about the proposal,” consultant Hackett said. “But we think it certainly is worth vigorous debate.”

Industry experts point out that in an national mergency, the state does not have access to any government-controlled crude oil or gasoline reserve. The pipeline systems that distribute crude oil from the federal Strategic Petroleum Reserve on the Gulf Coast can’t deliver any of that supply to California.

That could be yet another argument for the state establishing its own gas tank.

“When the strategic reserves were created, it didn’t matter because the West Coast was a net exporter” of crude oil, said Philip Verleger, a Newport Beach-based consultant and energy analyst with the Council on Foreign Relations. “Now we’re sitting high and dry out here.”