The Desert Sun (Palm Springs, CA)

WASHINGTON – Oil prices have fallen 25 percent over the past month as the war in Iraq has progressed without the feared massive disruption to Middle East supplies, but California drivers have seen little relief at the pump.

Last week, state officials predicted the average price of unleaded would go below $2 in California by Tuesday because of falling oil prices and the end of refinery problems caused by switching from winter to summer gasoline blends.

But that hasn’t materialized. The statewide price only dropped 3 cents from a high of $2.18 on March 21, according to AAA, the nation’s largest motorist association.

“The prices didn’t drop as steeply as we hoped they would,” said Rob Schlichting, a spokesman for the California Energy Commission.

Average unleaded regular gas was $2.15 a gallon in Riverside and San Bernardino counties Wednesday, according to AAA, down from a high of $2.18 last month.

The California Energy Commission released a report earlier this month that concluded that the high state’s gas prices, 50 cents more than the national average, were not due to price manipulation. The causes were high oil prices and problems caused by refinery switchovers to summer blends of gasoline.

But refiners have completed their switchovers and wholesale gas prices have come down, Schlichting said.

“It looks like dealers are taking extra profits,” he said.

Both consumer groups and Bob van der Valk, who represents the California Independent Oil Marketers Association, say the real problem is that a handful of companies control California’s gasoline industry. The major oil companies exert greater control of wholesale gas prices in California than in other parts of the nation and have been slower to pass through cheaper oil costs, said van der Valk.

“That’s why prices shoot up like a rocket and float down like a feather,” he said.

Also, lingering problems remain from the switch from MTBE to ethanol – gasoline additives that make gasoline burn cleaner.

The volume of ethanol added to gasoline is less than the MTBE being replaced so the difference must be made up with extra gasoline. That has upped California’s gasoline imports to 100 million gallons a month, which drives up the price, van der Valk said.

Jamie Court, executive director of the Santa Monica-based Foundation for Taxpayer and Consumer Rights, said the situation of tight gasoline supplies is similar to the California electricity market two years ago when a handful of generators could manipulate prices.

“What we found is we have five refiners controlling 90 percent of the gasoline supply in the state,” he said. “It’s just good business for them, but to consumers, it’s gouging.”

BP/Arco, California’s largest gasoline retailer, could not be reached for comment.  But John Felmy, chief economist for the American Petroleum Institute, a trade group of major oil companies, said gas prices always lag behind oil prices by six weeks or more because it takes that long for oil to be refined and shipped to gas stations.

Gas prices have fallen 10 cents a gallon nationally since March compared with a 24-cent-per-gallon drop in oil prices, so gas prices have further to fall, he said.

The oil industry isn’t helped by volatile prices, Felmy said.

“The industry is not making a lot of money,” he said.

Many experts expect gas prices to drop following the decline in oil costs, especially as Middle East supplies haven’t been seriously disrupted by the Iraq invasion.

Crude supplies should continue to increase, said John Lichtblau, chairman of the Petroleum Industry Research Foundation in New York. Iraq’s oil will eventually enter the market and prices should drop further.

But U.S. oil inventories remain very tight. Until recently, refiners had been maintaining low inventories because of high prices, said John Kingston, global director of oil at Platt, an energy research firm.

“The ultimate price of gas over the next few months will not be set by the war in Iraq,” he said.

The Energy Information Administration this week predicted national gas prices  of $1.56 for regular unleaded this summer, down from a high of $1.73 on March 17.

California lawmakers have grown increasingly concerned about both high gas prices and sudden increases at the pump.

One bill introduced this month in the Assembly would allow service station dealers to buy gasoline from outside their branded suppliers. Legislation offered in the state Senate would prohibit major oil companies from acquiring additional gas stations.

Sen. Barbara Boxer, D-Calif., introduced a bill this year that would require the Federal Trade Commission to investigate a state gas market for manipulation anytime prices rise more than 20 percent in three months.