The Madeleine Brand Show for August 7, 2012

Gas prices likely to spike in wake of Chevron oil fire

Eric Risberg/AP

Smoke pours from a fire at the Chevron Richmond Refinery, seen behind Alcatraz Island in San Francisco, Monday, Aug. 6, 2012. The refinery is the third largest in California and any slowing in production will cause gas prices to rise.

A massive fire that engulfed the Chevron oil refinery in Bay-Area Richmond Monday night has been contained and residents are stepping cautiously out of their homes.

As the smoke clears, fallout from the fire is expected to hit the gas pump. The Chevron refinery is the third largest in California, and processes nearly 250,000 barrels of oil every day. If parts of the plant stay closed, an increase in gas prices is likely to follow.

California is more vulnerable to supply problems because the state requires stricter cleanliness for its gas. If a major refinery goes down, there aren't a lot of other places that meet those requirements for California.

Californians are already paying 20 cents a gallon more this month than last month, with current average CA gas prices near $3.88, but prices have yet to eclipse the near-$5 mark from spring.

But according to Phil Verleger, president of PK Verleger, an energy analyst group, prices at the pump could increase more than 25 percent from their current average to above $5 a gallon, possibly by Labor Day.

Gas reserves are also historically low in the area, due to concerns about dropping gas prices later in the year. That's led the gas industry to slow gas production at a misopportune time for the region.

"California did in 2000 consider building a strategic reserve of gasoline," says Verleger, "but hasn't done it. So [gas prices] are at the mercy of the market." Refiners in Singapore and in the gulf coast could ship to CA, but that would take at least a month to make it to CA and lower gas prices.

According to Verleger, current environmental regulations provide a barrier to construct new refineries, so old refineries are relied upon heavily for gas. The Richmond Chevron refinery has been standing for 100 years, though components are often replaced and rebuilt.

In the past, refinery incidents have caused a pronounced bump in gas prices. A March 1999 fire at the refinery caused a spike of 25 percent in gas prices. A gas fire last week in Oklahoma drove gas prices up by 10 cents a gallon. A February fire in Washington shut production for three months causing gas to go up by $1 a gallon in some regions.

Guest:

Phil Verleger, president of PK Verleger, an energy analyst group


With contributions by Raghu Manavalan

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