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UC Berkeley economists find no shortage of culprits to explain California's high gasoline prices
19 June 2001

By Kathleen Maclay, Media Relations

Berkeley - Californians pay more for a gallon of gas than anyone in the United States, and University of California, Berkeley economists say this reflects more than the gas-guzzling Golden State's love affair with the SUV or the lure of the open road.

While the researchers cite plenty of reasons for California gasoline prices climbing 22 percent, from $1.60 a gallon at the start of the year to almost $2 a gallon by Memorial Day weekend, they said a large share of the blame rests with high profit margins enjoyed by California refiners. In comparison, this week the average cost of a gallon of gasoline across the country was $1.60.

"There is no shortage of culprits," researcher Richard Gilbert, a professor of economics at UC Berkeley, wrote in the State Controller Quarterly Newsletter for summer 2001. "The OPEC cartel; gas-guzzling SUVs; oil mega-mergers; and environmental restrictions are some of the usual suspects."

But in a just-released study, he and co-researcher Justine Hastings identify other factors also responsible for Californians taking the hit with higher gas prices. Since 1998 prices have soared by more than 15 percent per year. In the first five months of 2001, California gas prices rose another 22 percent. Reasons for the high prices include:

* Tight specifications for reformulated fuel and higher gas taxes than in other locations
* Limited competition among the state's dwindling number of oil refiners
* Limited pipeline connections linking Western states with other gasoline markets
* A smaller network of independent gasoline marketers, compared to many other regions of the country

These factors contribute to higher earning margins for refiners in California than elsewhere, said Gilbert, who worked with Hastings to analyze market structures and wholesale gasoline prices in 26 U.S. metropolitan areas from January 1993 through June 1997. Hastings was an economics PhD student at UC Berkeley at the time of their research. She joins the Dartmouth University economics faculty in July.

In examining the rising gasoline prices so far this year Gilbert noted that while higher crude oil acquisition costs for California refineries added 7 cents to the cost per gallon and taxes accounted for another 2 cents, "the most significant component in the rise of prices ... was the refiner margin."

The profit margins accounted for 27 cents of the increased average price per gallon of "branded" gas in the last few months. The refiners' profit margin stands at 58 cents per gallon in the first five months of 2001, underscoring a trend. The refiner margin in California reached 32 cents in 1998, 39 cents in 1999 and 42 cents in 2000. Compare that margin to the average for Gulf Coast gasoline for the first five months of the year, which was 41.4 cents, or 16.6 cents less than in California for the same period.

Gasoline refining "has been an unusually profitable activity in the past year," Gilbert acknowledged, noting that the debate appears endless about whether oil companies profits are excessive, or merely above previously depressed levels.

Also contributing to a supply-demand squeeze in California, Gilbert said, is "the popularity of gas-guzzling behemoths," and a thirst for gasoline that increased from 13.8 billion gallons in 1997 to 14.8 billion gallons in 2000. Meanwhile, no new refineries came online, he said.

The state's tougher emission controls account for 5 to 8 cents of the cost of a gallon of gas and the planned phase-out of the MTBE gasoline additive will likely add to the price, he said.

But even when considering all this, plus taxes that total 50 cents a gallon this year, Gilbert said Californians still pay significantly more per gallon for gasoline than do drivers anywhere else in the nation.

"Competition among gasoline refiners is limited in California's island economy," Gilbert said.

He counted six major refiners in the state with a combined crude oil processing capacity of 1.7 million barrels a day and a handful of smaller refiners that contribute 200,000 barrels a day. Terminals supplying wholesale gasoline to California cities have an average of three refiners that sell gasoline to any dealer, while the Gulf Coast states of Texas and Louisiana often have more than seven such refiners. The heightened competition at the Gulf terminals probably lowers refiner margins 3 to 5 cents a gallon, Gilbert said.

Gulf Coast refiners also compete for sales to a larger network of gasoline marketers that are not captive to a particular supplier. This competition shaves the per gallon cost of gasoline 1 to 3 cents compared to California, Gilbert said.

The University of California Energy Institute financed the research and Gilbert said the results should be used to inform merger policy in the gasoline industry. He suggested tougher policies on mergers that combine refiners and retailers, and stronger policies to promote sales of wholesale gasoline to independent retailers.

The future of gasoline prices depends on crude oil prices, Gilbert said. "However, refiner margins are not likely to fall sharply and may increase substantially with the MBTE phase-out."

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