The Breakdown

Explaining Southern California's economy

3 reasons LA is getting crushed by rising gasoline prices

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48455 full

Los Angelenos have been suffering at the gas pump over the past week. Prices spiked by more than 50 cents, with the average cost of a gallon of regular zooming closer to $5 than $4. Following a fire at Chevron's Richmond refinery in August, L.A. drivers had already gotten used to a new normal, with gas stuck above $4. But last week, in some parts of the area, gas stations were posting prices closer to $6.

In response, Sen. Dianne Feinstein (D-CA) fired off her second letter to the Chairman of the Federal Trade Commission, insisting that the dramatic price increase couldn't be blamed on market forces — a basic imbalance of supply and demand — and was instead due to Tesoro, a major supplier of California's unique blend of gas, getting caught in a "short squeeze" that placed the company at the mercy of traders who were more than willing to use a 97-cent-per-gallon hike in the wholesale gas market to victimize consumers.

In her letter, she cited a Reuters report that didn't allege market manipulation so much as an awareness that Tesoro didn't have enough fuel available to meet supply and had to go to the "spot" market, where those who had enough California-grade gas could name their price.

Feinstein also called for an investigation in the aftermath of the Richmond fire.

Oil analyst Gregg Laskoski of GasBuddy.com, however, said that he "hasn't seen anything that would place the blame on Tesoro." So why exactly is gas costing so much in Los Angeles these days?

Problems with the refinery system. All the bad stuff that could happen with refineries in California basically did. First there was the Richmond fire. Then last week, the heat wave in the Southern California region took the power offline at an Exxon refinery in Torrance. There was an oil pipeline failure that happened at the same time two Phillips 66 refineries were going offline for maintenance. And, as if that wasn't enough, all the state's refineries have been in the process of preparing for a switch from brewing up summer-blend gas to winter-blend gas. 

California is a gas island. California runs on its own special cuvée of petrol, called CARBOB. The only refineries that produce this blend are located in the state. So, if problems occur, it is effectively impossible to import gas from neighboring regions. So with four refineries either at partial capacity or out of action, "there was tremendous pressure on the consumer," said Laskoski. The good news is that the worst is probably over. Laskoski expects us to see some relief, and average gas prices in L.A. have started to fall.

The switch from summer to winter blend happened on — not ahead of — schedule. California Gov. Jerry Brown called for a faster switch, which normally occurs around October 30. In retrospect, given the loss of capacity at the Richmond refinery, it would have made sense to move to the winter blend earlier this year. As it stands, the accelerated switch "will be a welcome change for refineries," according to Laskoski. The winter blend is cheaper to produce and will enable a further reduction in prices — although Laskoski's colleague, Patrick DeHann, told me that $4-plus gas is likely to persist in L.A. through Christmas.

Given all this turmoil in the California gasoline market, wouldn't it have made sense to suspend the rules that govern the type of gas we can burn, if only for a brief period of time?

"There was more than enough justification to bring in non-CARBOB gas," Laskoski said. "Some markets saw prices well over $5."

Los Angeles Gas Prices provided by GasBuddy.com
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Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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