According to AAA, the current national average price of regular-grade gasoline is approximately $3.80 per gallon. In some areas of the country, consumers are paying close to $4 per gallon, but for residents of California, the prices are much higher. In California, the average price is approximately $4.61 per gallon, 21% higher than the national average. Why is the price of gas higher in California?

Different Gas
In the mid-1990s, California started requiring a higher grade of gasoline to help fight air pollution. In order to meet the new standards, refiners had to install costly upgrades, forcing many to leave the state. This left only a small number of refiners to provide the special blend for the state. In normal environments, the cost to California drivers is usually 25 cents higher per gallon compared to drivers in other states, but the problem is more complicated than this.

Refiner Problems
Because there are a relatively small number of refiners providing gasoline to California, when one experiences problems, supply disruptions can have a large effect. The Chevron Refinery near San Francisco provides a significant amount of gas to Californians. Its normal refining capacity is nearly 243,000 barrels per day, but in August a fire at the facility resulted in a significant drop in production. The Kettleman-Los Medanos pipeline, which carries 85,000 barrels of crude oil to the San Francisco Bay area, was closed in September because of contamination, and a 149,000-barrel-per-day refinery near Los Angeles was shut down in early October due to a power outage. These disruptions, along with a limited pipeline infrastructure in the state, have caused supply difficulties which have contributed to the rise in prices.

Emotional Buying
When California consumers heard about the spike in gas prices, they did what Wall Street investors know not to do: they bought at the highs. Fearing that prices would continue to rise, "NBC News" reported that consumers rushed to fill their tanks, fearing much higher prices were on the way. This, according to experts, only serves to drive prices even higher as limited supply cannot meet the outsized demand.

Conspiracy Theories
When energy prices rise unexpectedly, theories of manipulation are quick to surface. The Washington Post reports that state refiners may be holding back supply of the special blend gasoline to drive prices higher in order to increase margins. Although just a theory, the report notes that any such manipulation is difficult to prove, and there is no law preventing it.

The Blends
To help curb the sharp spike in gas prices, on Oct. 7, California governor Jerry Brown ordered the California Air Resources Board to allow winter blend gasoline to be sold immediately instead of the normal Oct. 31 switch from the summer blend. The two blends evaporate differently in order to minimize smog at different times of the year. If the winter blend hits the market sooner, supplies should increase and bring prices down to levels more in line with the national average.

The Bottom Line
Californians have experienced record high gas prices, likely as a result of a perfect storm of factors coming together to take the state by surprise. Because of recent action by Governor Jerry Brown, prices should return to normal levels. When energy prices suddenly rise, calls for investigations of energy manipulation come from multiple sources. Although this appears to be a short-term bounce based on real factors, proving market manipulation is difficult. Experts advise consumers to make lifestyle changes to deal with short-term price spikes. Large scale purchasing only serves to drive prices higher when the product is in short supply.

Related Articles
  1. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  2. Economics

    Explaining Market Penetration

    Market penetration is the measure of how much a good or service is being used within a total potential market.
  3. Economics

    Calculating the Marginal Rate of Substitution

    The marginal rate of substitution determines how much of one good a consumer will give up to obtain extra units of another good.
  4. Stock Analysis

    Is the Apple Watch a Real Threat to Fitbit?

    Examine the potential for marketplace competition between Fitbit and the Apple Watch in the rapidly growing consumer wearables industry.
  5. Investing News

    How 'Honesty' Could Pay off for Jessica Alba

    Is it possible that Jessica Alba is one of the savviest businesswomen on the planet?
  6. Stock Analysis

    3 Stocks to Protect Your Portfolio from Inflation

    Discover three stocks to protect portfolios against inflation. The best companies to protect against inflation are those with pricing power.
  7. Chart Advisor

    Invest In Consumer Staples With This ETF

    The consumer staples sector is showing signs of strength in a weak market. We'll take a look at a couple ways to make a trade.
  8. Stock Analysis

    J.C. Penney: Identity Crisis or Buy Opportunity?

    With so many recent leadership changes, J.C. Penney might be suffering from an identity crisis. Here's why and what you need to know.
  9. Stock Analysis

    How Nike (NKE) Continues to 'Do It'

    Other than style, do sneakers from any maker really differ that much? That's debatable. But this is certain: Nike sets the standard for selling an image.
  10. Economics

    What's a Stock Keeping Unit (SKU)?

    A SKU, or bar code, is a unique identification code that retail and wholesale sellers use to track their inventory of products and services.
RELATED TERMS
  1. Duty Free

    Goods that international travelers can purchase without paying ...
  2. Fast-Moving Consumer Goods (FMCG)

    These are consumer goods products that sell quickly at relatively ...
  3. Topside

    The upper part of an oil platform—above the water line—that ...
  4. FPSO (Floating Production Storage ...

    Acronym for Floating Production Storage and Offloading. FPSO ...
  5. Virtual Good

    A good or product traded in the non-physical realm, typically ...
  6. Buyer's Option

    In commercial contracts, an agreement between a vendor and a ...
RELATED FAQS
  1. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  2. What are some common ways product differentiation is achieved?

    There are many ways to achieve product differentiation, some more common than others. Horizontal Differentiation Horizontal ... Read Full Answer >>
  3. What is the difference between an OEM (original equipment manufacturer) and a VAR ...

    An original equipment manufacturer (OEM) is a company that manufactures a basic product or a component product, such as a ... Read Full Answer >>
  4. Is the retail sector also affected by seasonal factors?

    Generally speaking, the retail sector is highly seasonal. Almost invariably, sales in the retail sector are highest in the ... Read Full Answer >>
  5. What has the retail sector evolved to its current structure?

    Retail is the catch-all phrase for the sale of final goods to consumers; a retail transaction is considered an "end" and ... Read Full Answer >>
  6. Why is product differentiation important in today's financial climate?

    Product differentiation is essential in today's financial climate. It allows the seller to contrast its own product with ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!