The fire that broke out at Chevron's Richmond refinery last night is now under control, but the impact on gas prices in the California is just beginning. Even though the damage was done in the Bay Area, Southern California is likely to feel the impact. Here's a Q&A to explain the situation.
Q: How expensive is gas going to get in SoCal?
A: Analysts who follow the oil-and-gas markets have been reported predicting a spike of 25-40 cents this week, in a California market that's already paying a lot more for its gasoline than the rest of the country: $3.86 per gallon versus $3.63 for the rest of the U.S., according to AAA (via CNBC). Los Angeles drivers are paying even more than that: $3.93 per gallon. That's a ways off from the $5 per gallon peaks that we hit during the summer of 2008. But it still isn't pretty.
Q: Can't the loss of capacity at the Richmond facility be made up elsewhere?
A: Chevron operates two refineries in California. One is near Los Angeles, in El Segundo. The Richmond facility, in the Bay Area, is one of the country's oldest. It opened for business in 1902. Despite its age, it still accounts for roughly 15 percent of all the gas that flows into drivers' tanks in the Golden State. And it's not as if that capacity can be easily made up; plus, California runs on a special blend of fuel that's pricier then what propels the nation as a whole — as much as 30 cents more.
Q: Why don't Chevron and others build more refineries in California?
A: It's not worth it. The refining business in the U.S. runs on narrow profits margins, and while it's gained in efficiency in the past few decades, it's seen overall capacity decline, as the entire industry adapts to a future in which demand for gas in the U.S. will fall, even as it grows in the developing world. Chevron could build another refinery in California — but it would be investing in the wrong place! Besides, it's environmentally difficult to build new refineries: the permitting alone can take years, assuming that residents even allow construction to be considered. And as the Financial Times recently noted, cars that are more fuel-efficient (and slated to become more fuel-efficient still, as new regulations kick in) are reducing demand, as is high unemployment (10.7 percent in California).
Q: Can California "import" gas from other parts of the U.S.?
A: No. California is part of the West region — there are five total regions in the U.S. — and is often described as an "island" as far as the oil-and-gas market is concerned. In fact, other western states rely on California to operate as a gas exporter. Pipelines carrying gas could be built from other regions to the West, but because California uses a specially formulated type of gas (see above), it doesn't make sense for refiners to make the commitment.
Q: Will this hurt Chevron's bottom line?
A: Chevron is the number three company on the Fortune 500 list for 2012. It made $27 billion in 2011. So it can probably handle this, given the the Richmond refinery wasn't completely destroyed and could be repaired in a few months. Temporarily losing some capacity might actually help Chevron's profits, as the company will be able to charge more at the pump. Additionally, Chevron would like to reduce its refining operations, which have been hurting profits, and focus on exploration and development of oil reserves worldwide. It had planned to retrofit the Richmond facility several years ago, but ran into legal trouble. At the time, the company discussed literally selling the refinery to the Chinese — and moving it to China! The accident may hasten the refinery's demise — or relocation.