The Breakdown | Explaining Southern California's economy

High California gas prices are actually a good thing

Gas prices at a Chevron station in Pasadena, CA.
Gas prices at a Chevron station in Pasadena, CA.
Corey Bridwell/KPCC

Time to panic about rising gas prices in the Golden State? Most definitely, if you accept the L.A. Times' analysis:

The [gas] price surge has been particularly steep in California, in part because of maintenance at some refineries that make the state's cleaner-burning gasoline. Statewide, average pump prices for regular gasoline crossed the $4 mark over the weekend and reached an average of $4.031 a gallon Monday, up 5% in just the last week and nearly 9% higher than a month ago.

The price of oil is also moving up, due largely to two factors: worries about unrest in the Middle East over Iran's nuclear program; and commodities speculation. That second one is significant. Hedge funds could be playing the price run-up two ways, by betting on higher prices in the future, or by "shorting" the market and wagering that the price will come down.

In any case, you can see how difficult it can be to understand why gas gets so costly. It really boils down to refining capacity. As this MarketWatch report points out, the refining business in the U.S. is in the midst of the long-term transformation. There's not much point in laying out the risk capital to expand refining capacity when there may be a reduced market for gas in the future. Efficiency is the critical factor — vehicles are going to consume less fuel in the future, through a combination of improved internal combustion engines, hybridization, electrification, the arrival of more clean diesel, and so on.

So the big boys are getting out of the game, leaving small players to duke it out.

Even a release from the Strategic Petroleum Reserve — which currently stands at 727 million barrels — wouldn't have much of an impact, given the refining issues. In a nutshell, the market is saying that there will be less demand for gas in the future, and it's making the logical adjustment, which is to streamline refining capacity now. In the interim, this structural change is pushing up prices, along with some other geopolitical and global-market issues.

In California, gas at $5 has usually had a beneficial effect, however. It's reduced traffic. This last happened noticeably in 2008, when gas prices spiked. The question is whether the state's auto fleet is now more — here's that word — efficient. Drivers may be able to afford to higher price at the pump. The challenging thing will be to continue spending in other areas, to sustain what is a slowly building economic recovery.

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