Require More Inventory At Oil Refineries, Watchdog Says

Jamie Court has what he says is a simple way to prevent the gasoline price spikes that have cursed California drivers for years: Require refineries to keep at least three weeks' worth of gas in stock at all times. If a refinery breaks down, the market will still have plenty of fuel.

"That's the one thing that's going to cushion the market from price spikes of 25 cents overnight," said Court, president of the Public Watchdog consumer group. "The simplest solution is to require them to have ample inventory."

Sudden swings in the price of gas have become an ugly fact of life in the Golden State. Last October's run-up was the worst to date, with California's average price for a gallon of regular jumping 51 cents in less than two weeks to $4.67, a new record.

The rest of the country suffers price spikes, too. But the unique nature of California's gasoline market, cut off from the rest of the country by geography and regulation, makes the state more prone to price jumps than most.

Various politicians, economists and activists have suggested ways to render such spikes less likely or less severe. On orders from the state Legislature, the California Energy Commission in 2003 even explored creating a "strategic fuel reserve" of gasoline, similar to the Strategic Petroleum Reserve run by the federal government. The commission eventually advised the Legislature to drop the idea, saying it could have a host of unintended consequences.

That same fear has sidelined many of the other proposed solutions. The oil industry has argued that tinkering with something as complex as a fuel market can easily go awry.

"Any proposal like that would need to be carefully studied and thoroughly understood, because it's not uncommon for changes that sound good at first blush to end up having negative impacts on consumers," said Tupper Hull, spokesman for the Western States Petroleum Association. "We don't share the view that
government regulation ever makes fuels more available and less costly." Instead, he said, the state should allow refineries to upgrade and expand their capacity to produce fuel.

Unique gas blends

Energy economist Severin Borenstein suggests a different approach. California uses its own pollution-fighting blends of gasoline, blends not found in any other state. So if a refinery fire or other problem cuts gas supplies in California, let the oil companies sell out-of-state gas here, Borenstein says. Make them pay the state a fee for doing so, and use the cash to cut air pollution in other ways.

"If we allow conventional gasoline in these very rare circumstances and use that money to offset the pollution, we can take the top off these price spikes without doing environmental harm," said Borenstein, director of the University of California Energy Institute at UC Berkeley.

The state does have policies that officials hope will ease California's dependence on oil and gasoline, taking the sting out of price spikes. But it remains to be seen whether those policies will have the desired effect.

For example, California's "low-carbon fuel standard" will force fuel suppliers to cut the carbon-dioxide emissions associated with their products, most likely by blending more ethanol into their gasoline. Oil companies have warned that the standard, combined with some of California's other policies to fight global
warming, could force some of the state's refineries to close.

The state depends on a limited number of refineries – just 14 – for its gas. If one of those refineries suddenly has to scale back production, due to a fire or mechanical failure, the rest can usually pick up the slack. But if several go down at the same time, their absence in the market can create a shortage.

Last fall's price spike happened after an electrical outage shut down an ExxonMobil refinery in Los Angeles County. The incident strained a fuel market that was already dealing with reduced production from Chevron's Richmond refinery, following an Aug. 6 fire.

No out-of-state lines

No pipelines exist to bring gasoline from elsewhere in the country in case of emergencies. And since other states don't use the same fuel blends, companies can't easily buy the right kind of gas to make up for any shortfall in California.

Hence Court's idea of requiring reserves.

His organization has been fiercely critical of the oil companies and has often called for regulating the industry. Failing that, however, ordering refineries to keep three or four weeks of gasoline in storage would ensure that temporary shutdowns wouldn't cause serious price spikes, Court said.

"This is just a simple requirement, in the same way that the California Public Utilities Commission requires that electric utilities have ample electricity to serve the state," he said.

Borenstein argues, however, that requiring reserves would create its own complications. Building or renting storage tanks costs money, and that extra cost would eventually work its way into our everyday gas prices. And during shortages, companies might want to hold onto as much fuel as possible for as long as possible to keep the price high, he said. The only way to prevent that would be for the government to have a hand in determining when gasoline from those reserves would be released.

"Then we're in the business of the government actually controlling reserves, not just requiring them," Borenstein said.

He suggests letting the oil companies sell gas that doesn't meet California's rigorous environmental rules, but with a fee of perhaps 25 cents per gallon, paid to the state.

At that level, the fee would be high enough to discourage using out-of-state gasoline most of the time. Only during a shortage would paying the fee make sense for the oil companies. And since California's refineries already produce gasoline for neighboring states – supplying almost all of Nevada's gas, for example – they could sell some of that fuel here rather than importing supplies from elsewhere.

Fuel or air pollution

California already has something similar. The California Air Resources Board, which regulates air pollution, allows refiners to use out-of-state gas for a fee of 15 cents per gallon, said spokesman Dave Clegern. But refiners have to get the board's approval first. Companies have occasionally approached the board about it. But such discussions have been rare, because the companies consider the fee prohibitively high, Clegern said.

To date, the board has never issued an approval. Clegern said the board is loath to allow anything that would increase air pollution in the state, even temporarily.

"Every time this comes up, we have to ask this dicey question of, 'What is the health of Californians worth?' " he said. "Is your health worth 25 cents per gallon?"

Borenstein said that under his proposal, the state could use the money to buy up old, heavily polluting cars and get them off the road.