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UC Berkeley professor proposes potential solution to California's skyrocketing gasoline prices to legislators

– A proposal that a University of California, Berkeley, economics professor says could unlock the state's gas market and significantly lower gasoline prices was presented to a California legislative committee today (Wednesday, April 28).

UC Berkeley Economics Department professor and chair Richard J. Gilbert said California refinery margins are about 20 cents per gallon above the national average, costing California consumers an additional $250 million in March alone.

Gilbert said the best way to reduce these margins is to break the ties between the refineries and retail gasoline stations they control. This, said Gilbert, will help foster more independent gas stations, encourage competition, and help drive down gas prices.

Gilbert testified in Sacramento at a hearing of the State Assembly's Select Committee on Gasoline Competition, Marketing and Pricing. He is a former deputy assistant attorney general for antitrust economics in the U.S. Justice Department and is a former director of the University of California Energy Institute. Justine Hastings, an assistant professor of economics at Yale University and a former Ph.D. student in UC Berkeley's economics department, joined him in presenting the plan they formulated.

In his prepared remarks, Gilbert said, "A key to lower gasoline prices in California is to unlock the ties that currently exist between California refiners and retail stations. These ties lower incentives for retailers to shop for cheaper gas and in this way make it less profitable for refiners to lower prices. These ties also make entry difficult for new wholesale suppliers and narrow the supply available to independent, unbranded marketers."

Gilbert and Hastings presented an "unbundled supply" plan that would have California wholesale gas suppliers offer generic, unbranded gasoline for sale at the distribution terminal. Branded gasoline dealers would pay separately for additives that identify their brands, and sell those products apart from fuel.

Said Gilbert, "Gasoline produced at California refineries is a generic product. All gasoline sold in California has to meet the same environmental specifications. Gasoline refiners often exchange gasoline and store gasoline at terminals in commingled facilities. Gasoline is fungible when it emerges from the refinery. The gasoline that is produced at a Chevron refinery is not substantially different from the gasoline produced at a Shell refinery.

"Branded gasoline becomes a distinctive product when brand-specific additives are introduced, such as Chevron's Techron. These additives are blended with gasoline streams at the distribution terminal before the gasoline is loaded into tanker trucks for delivery to stations. In the current supply system, generic gasoline and the additives that identify the brand of gasoline are essentially separate products. Our proposal requires that California suppliers market generic gasoline and their additives as truly separate products. They would not sell branded gasoline. Instead, they would sell generic gasoline and brand-specific additives to retailers who want to market their brands."

After the three-hour legislative hearing, Gilbert described the committee's reaction as "very enthusiastic."

Additional details about the proposed plan can be found in the statements Gilbert and Hastings prepared for the legislative committee, which are online (PDF documents).