Explaining Southern California's economy

FAQ: How high will gas prices go in Los Angeles?

US-CALIFORNIA-GAS-PRICES

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Prices at the pump have risen drastically in Los Angeles over the month of February.

Gas prices in Los Angeles have shot higher during February, hitting an average of $4.38 a gallon for regular gas on Thursday before retreating slightly on Friday. Over the month, the price rose a whopping 64 cents, handily beating the increase for the Southern California region, which was itself a record.

So how high will prices go? 

Glad you asked...

Q: Seriously — how high are gas prices going to rise in L.A.?

A: According to Gregg Laskoski, an analyst as GasBuddy.com, Southern California is "ground zero" for gas prices increases. He and his team are forecasting that prices could peak at as much as $4.65 a gallon in a few months. Currently, prices have stabilized. But that doesn't mean they won't head higher.

Q: What's making gas prices rise so fast?

A: There are several factors. First, California is what analysts often call a "gas island" — the state's regulations stipulate cleaner-burning fuel that already adds about 30 cents per gallon.

Second, California is tied to the fortunes of its limited refinery network. We lack a network of pipelines to bring in gas from outside the state. Last year, when a fire at Chevron's Richmond refinery in the Bay Area reduced production capacity, gas prices spiked until Gov. Brown authorized an early switch to a cheaper "winter blend" of fuel.

Third, the energy markets are global. So when investors start looking ways to make money, they will "rotate" in and out of asset classes — and oil, given the volatility of its pricing, is a great place to seek profits. This happens all the time, but a lot of capital rushing into the futures markets for commodities can sometimes coincide with our final factor: Refineries performing maintenance and switchovers from one blend of fuel to another.

California's refineries are currently doing just that: switching from the winter to the summer blend and dialing back capacity while they perform maintenance. They're currently running at barely 80 percent of capacity, which is an improvement from an earlier 75 percent, Laskoski said. Once that process is finished, he said we may see a brief pullback from current levels. 

Q: And what about price gouging? 

A: Prices have popped over $5 a gallon in some isolated parts of L.A. But as tempting as it is to cry foul, consumers in the region need to understand how distorted the pricing situation is for the stuff that powers our car-centric culture.

We're not likely to roll back environmental regulations (remember smog?), and unfortunately, the refining industry is undergoing a large-scale process of adjusting to a lower-demand environment in the United States as cars become more fuel-efficient. They'd rather be running refineries in the developing world, where demand for gasoline is expected to surge.

Laskoski also noted that the U.S. government's policy of maintaining a weak dollar is hurting consumers. This makes U.S. exports more attractive in overseas markets, but Laskoski said that it means that it costs "more dollars to get oil out of the ground, more to refine that oil into gasoline, more to buy gas at the pump." 

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