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?
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.
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.
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.
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.
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.