Business Update with Mark Lacter

Hot weather and unstable power supplies affect consumer pocketbooks in California

KPCC's business analyst Mark Lacter explains how strong temperatures and power supply issues can create energy issues in California.

Steve Julian: Mark, we've been seeing gas prices spike like the thermostat. Assuming this is from the Chevron refinery fire up north, how high will prices go, and for how long?

Mark Lacter: Well, average prices in the L.A. area are running around $4.15 a gallon, Steve - and the numbers are likely to go up a bit higher. It turns out that last week's refinery fire in the Bay Area resulted in a lot more damage than they initially thought and it may be up to six months before they're able to make all the repairs. That means Chevron is going to have to get its supply from other sources and that puts a squeeze on the entire energy market, especially on the West Coast. And they can't just truck in gas from another part of the country because they need to sell a special blend of gasoline that meets air quality standards in California.

Julian: When I was young and naive, I assumed the price of gasoline simply reflected the price of oil.

Lacter: For the most part, it still does. But there are other factors, such as these refineries - and, in California, they tend to be very old (the Richmond facility where all this happened was built more than a century ago, and investigators are looking at possible corrosion on an old pipe that was installed in the 1970s). The other thing about refineries is that they typically operate at very close to full capacity, which means that there isn't much margin for error if there's a problem.

Julian: So, why not just build more refineries?

Lacter: Well, first of all, the environmental restrictions make it a non-starter - it would just take way too long, and cost way too much. But the other reason is that the oil industry isn't interested in expanding capacity because it would depress prices. As it is, profit margins for refiners have tended to be on the low side. By the way, production problems are not just a California thing - refineries in Indiana and Illinois were shut down because of equipment problems. Both resulted in higher pump prices. This stuff just happens.

Julian: I see that BP is selling its big refinery in Carson.

Lacter: That's right - the company is still trying to cover the cost of the disaster in the Gulf of Mexico a couple of years back. The buyer is Texas-based Tesoro, which will pay about $1.2 billion for the refinery, and $1.3 billion for the BP inventory. But that leaves just two companies in control of California's major refineries, so it wouldn't be surprising if state and federal regulators take an extra look at this deal.

Julian: Let me ask about another source of vulnerable power: California's power grid. Are you concerned?

Lacter: Yes, but it's a problem that folks only notice during a heat wave. State power officials are calling for a Flex Alert today because of concerns about having enough electricity to meet demand. A lot of that concern is due to the nuclear plant at San Onofre being shut down. This goes back to the beginning of the year when they discovered a small release of radioactive gas. Then, they found a few other problems. No indication that these are serious problems, but they do have to be fixed, and then federal regulators have to inspect them carefully. It's a process that can go on for many months, certainly beyond the current heat wave.

Julian: Therefore, Southern California Edison has to find other power sources...

Lacter: ... and state officials are asking other power plant operators to hold off on maintenance activities. They just want to have as much supply as possible. So far, so good - peak power demand is still below what's available, as long as everyone cooperates by keeping energy usage down between 11 a.m. and 6 p.m. But, it's not just having enough power - the hot weather puts an extra burden on these power lines and transformers - and it can shut down the system. Locally, it's been the cause of blackouts. Just with the oil refineries, a lot of these plants are old and vulnerable. And a full-fledged replacement would just cost too much. So, we're left with a kind of band-aided system. And everybody is holding their breath.

Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.


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