Business Update with Mark Lacter

When will gasoline prices come down in California?

KPCC's business analyst Mark Lacter explains what's going on with the cost of gasoline.

Steve Julian: Gas prices in California inched up to a record high overnight – the fourth day in a row. What’ll we see in the next few days?

Mark Lacter: Well, prices are definitely coming down, Steve. Wholesale prices have fallen sharply – those are the same wholesale (or spot) prices that shot up last week and caused the big run-up. Of course, prices normally go up a lot faster than they go down, but the circumstances behind this particular run-up are so unusual that it wouldn’t be surprising to see the number drop a lot quicker. Just to recap, the current average price of regular in the L.A. area is $4.70, which is basically unchanged from Monday; just 10 days ago it was $4.15. As to why this happened... well, the refinery business is not exactly easy to figure out, but this was most likely a confluence of events that could not have been anticipated.

Julian: Starting with the Chevron refinery in Richmond...

Lacter: In August, yes (that facility continues to operate at less than capacity). Also, a pipeline has been closed for several weeks because of elevated levels of something called organic chloride. And, what seems to have really tipped the supply problem was a power outage last week of the Exxon Mobil refinery in Torrance. That facility has reopened, which is good news, and Governor Brown has moved up the time in which refiners can switch over to winter-blend gasoline (which is easier and cheaper to produce), and that means supplies are expected to loosen up.

Julian: More supply means lower prices...

Lacter: That’s right. Now, there’s been all sorts of suspicion about market manipulation – that all the suppliers got together and decided to hold back on the amounts of available gasoline – and that, in turn, caused the run-up because buyers were desperate to find gas at any price. When they couldn’t – or if the price was prohibitive – they just shut down their pumps. Now, manipulation is not some crazy idea – it happened in California when Enron and other traders played around with supplies of electric power in 2000 and 2001 (you might remember those rolling blackouts and then the huge increases in electric bills). But, there’s a big difference between a group of traders conspiring to limit the amount of electricity available - which is what happened with Enron - and a gasoline supply shortage that comes about after a series of unrelated events, which is what’s happening here.

Julian: What are the legalities involved as to prices?

Lacter: Well, I know that Senator Dianne Feinstein wants a federal investigation into what happened – and maybe that’s a good idea. But, here’s the key point: there is nothing illegal about a supplier holding off on selling its product in the expectation that prices will keep rising. That’s what’s known as a prudent business decision. Steve, if you’ve put your house on the market on a Monday and I come along with an offer on a Tuesday, you might want to hold off on a sale if you’re convinced that you’ll be getting higher offers on a Friday.

Julian: So, what does this say about the state’s refinery system?

Lacter: It says that the refineries are very old, they’re operating at close to full capacity, and because state regulations require that special blend, they can’t be supplemented with gas from other parts of the country. And that’s why California can be so vulnerable when refineries go down for extended periods.

Julian: Does that support the case for electric cars?

Lacter: Not really – unless you’re planning to keep the vehicle for a lot of years. Now, it’s true that the day-to-day operating costs for a battery-operated car are way lower than for a gas-powered car, even a fuel efficient one. Where it gets tricky is determining the overall cost of the car – not just operating costs but the actual purchase. And as we pointed out last week, Steve, the upfront costs can be quite a bit higher than conventional vehicles, even after the $7,500 federal tax credit.

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


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