Bulk of Gas Price Rise Is Flowing to Oil Companies

The 51-cent jump in California’s retail gasoline price since late February is benefiting oil companies at the expense of motorists and has prompted state Atty. Gen. Bill Lockyer to widen an investigation into the way gasoline prices are determined.

California drivers, on average, are paying slightly more than $1.62 a gallon for regular unleaded self-serve gasoline, compared with $1.11 on Feb. 22, before a series of unrelated refinery mishaps began, according to the California Energy Commission. A dealer trade group contends that oil companies are on the winning end of the gas pump.

“The consumers think the station owners are ripping them off because the dealers are flying the oil companies’ flags,” said Dennis DeCota, executive director of the California Service Station & Automotive Repair Assn., a Novato-based trade group.

“We’re not making any money,” DeCota said. “The oil companies are making a lot of money,” reaping a dramatic increase in typical refining revenues.

Californians buy about 38 million gallons of gasoline a day, so a 51-cent price hike means the state’s gas users are coughing up $19 million more for fuel daily.

In Sacramento, Lockyer said Wednesday that he is expanding his antitrust unit’s year-old investigation into gasoline pricing to include the latest round of increases at the pump.

“The initial investigation suggests that there has been price gouging by the oil companies, and the state should take a more active role in trying to prevent that,” Lockyer said.

He said the state’s remedies range from an injunction barring future practices to civil fines to criminal penalties, though he said he doubts there was “active collusion.”

The volatile California gasoline business is feeling the heat from different directions:

* The Federal Trade Commission has been investigating California gasoline pricing practices for a year.

* A class-action price-fixing lawsuit against most of Big Oil has been struggling through San Diego County Superior Court for nearly three years.

* Legislation to limit the ways in which petroleum companies can set prices to dealers awaits hearings in the California Senate.

* San Diego County supervisors voted Tuesday to ask the San Diego City Council to adopt a proposal to curb the pricing power of oil producers.

Energy economist Philip K. Verleger Jr. said fuel price spikes usually spark political furor. A sharp rise in gasoline prices in 1996, when the state’s reformulated gasoline was introduced, brought a Justice Department investigation that ended quietly.

“They concluded that there was no conspiracy in 1996,” Verleger said. “This is the way the market works. It provides employment for economists and lawyers.”

Oil companies contend that market forces of supply, demand and competition, among other things, determine what consumers pay at the pump. Refinery profits have been slim in recent years because of an inventory glut as well as the increasing complexity of making California’s gasoline, which is specially formulated to meet the state’s strict air quality standards, analysts say.

“The marketplace tells you what to charge,” said Fred Gorell, a spokesman for San Francisco-based Chevron Corp., which lost a gasoline-producing unit last month in an explosion at its still-operating refinery in Richmond. That followed a fatal explosion and fire at the Tosco Corp. refinery in Martinez, Calif., on Feb. 23, which has been shut down pending safety investigations, as well as temporary outages at a few other of California’s 13 major oil refineries.

“Lately there’s been a real mismatch in supply and demand,” leading to the sharp price increases, Gorell said.

The good news for motorists is that the price of gasoline is expected to begin easing soon, although probably not to those rock-bottom levels of recent memory. Wholesale prices have begun declining and isolated retail stations have also reduced prices, said Trilby Lundberg, whose Camarillo-based Lundberg Survey looks at prices at 10,000 gasoline stations nationwide.

“A few stations have peaked in price and have begun to come down,” said Lundberg, whose most recent survey Friday found the average price of unleaded self-service gasoline in the Los Angeles area was $1.53 a gallon. The same survey revealed that San Francisco, at $1.65 a gallon, had dethroned Honolulu as the most expensive gas town in the nation.

The conventional explanation for this costly turn of events is the state’s refinery problems and rising oil prices thanks to a recent OPEC oil cartel agreement to reduce production. What’s more, California gas prices tend to begin rising each spring because of increased driving and the annual switch at refineries to production of an even more specialized summer gasoline to meet stricter hot-weather pollution requirements.

But there’s more at work here. As in so many other things, California is unique when it comes to gasoline: Its clean-air regulations add as much as 15 cents a gallon to the price; fuel is sold differently here, with a predominance of a few brand names and few independent retailers; and California residents use more than in other places.

So when something goes wrong, the effect is magnified, pumping up profits for the oil industry.

Nationwide, the average price of gasoline has been rising more slowly, up 16 cents in the last month to an average of $1.14 a gallon for regular self-serve unleaded, according to the Energy Department.

Only a few months ago, motorists were enjoying some of the lowest inflation-adjusted gasoline prices since the Depression because of overproduction of oil and slowing demand brought about by worldwide economic problems.

With the current average retail price of unleaded gasoline at $1.62 a gallon in California and the average wholesale price at about $1, service station owners and the tax collector get a few pennies more, but most of the gain ends up with those oil refiners that are up and running.

Oil refineries are getting about 64 cents a gallon (less the price of crude oil) now, compared with 22.5 cents a gallon in February, when gasoline retailed at about $1.10 a gallon and wholesaled at about 53 cents, according to the California Energy Commission.

DeCota’s trade group believes refinery margins are even higher in Northern California, where the group has closely tracked prices. (Refinery margins are not the same as profits, but represent how much money the refinery has available to pay its production and distribution costs after it has paid for crude oil. But a larger margin would generally leave more for profits after these costs are deducted.)

Stock market analyst Andrew Fairbanks, who follows refining operations for Prudential Securities, said the typical refining margin in California is about $8.30 per 42-gallon barrel, or nearly 20 cents a gallon.

DeCota said wholesale price increases came first and were larger for Shell-Texaco dealers, some of whom have been losing money on each gallon of gas they sell. The Western U.S. refining and marketing operations of Shell and Texaco merged two years ago to form a company called Equilon.

Houston-based Equilon responded to a request for comment with a one-sentence statement: “The price of gasoline is influenced by a variety of factors, including competition in the marketplace, supply and demand, product costs, world economic conditions and state and local taxes on gasoline, among other factors.”

A Chevron executive lamented recently that the company often makes more profit selling its plastic toy cars than it gets from a tank of gasoline.

In a speech in October to the Concord Rotary Club, Retail Marketing General Manager Dave Reeves said Chevron must “make profits when we can.”

“In this market and every other, for each day that Chevron earns a good profit we have to expect another day when the market’s going to hand us the opposite,” Reeves said. “No business should have to apologize for that.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Pumped Up

The retail price of gasoline has jumped more than 50 cents a gallon since late February, and most of that windfall is going to oil companies. A look at how the increase is being divvied up:

Then and Now

In late February, when Alaskan crude was $12.47 a barrel and gasoline* retialed for $1.10 a gallon

Dealer margin: 13

State/local sales tax (8%): 8.2

State excise tax (flat rate): 18

Federal excise tax (flat rate): 18.34

Refinery margin: 22.5

Crude oil cost: 30

*

Now, with Alaskan crude at about $15 a barrel and a gallon of gasoline* costing $1.62 a gallon

Dealer margin: 15

State/local sales tax (8%): 11

State excise tax (flat rate): 18

Federal excise tax (flat rate): 18.34

Refinery margin: 64

Crude oil cost: 36

* California reformulated unleaded regular

Sources: California Energy Commission, TImes estimates