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James Hamilton

James Hamilton

James is the Editor of Econbrowser – a popular economics blog that Analyses current economic conditions and policy.

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Friday's Gas Price Spike in California

Gasoline prices in California are usually 30-40 cents a gallon higher than the rest of the country. About 20 cents of that is due to higher gasoline taxes in California and much of the rest from the fact that we use a higher quality of gasoline in order to reduce air pollution. But the average retail price of gasoline in California jumped 50 cents a gallon last week, even as the price elsewhere in the country was heading down. The average price in the Golden State on Friday was $4.64 a gallon. That compares with a California high of $4.38 reached this spring and $4.59 in June of 2008.

Average Retail prices Across the US
Average retail gasoline prices by U.S. county. Source: GasBuddy.com.

California has experienced a series of disruptions to gasoline supplies. The Chevron refinery in Richmond (across the bay from San Francisco) has a normal capacity of 243,000 barrels per day, or 8.5% of the total petroleum products supplied to Petroleum Administration for Defense District 5, of which California is a part. But a fire at the Richmond refinery in August has significantly reduced its production. The Kettleman-Los Medanos pipeline, which carries 85,000 barrels per day of crude oil to the San Francisco Bay Area, has been closed since mid-September due to organic chloride contamination. And on Monday, a power outage shut down ExxonMobil's 149,000-barrel-per-day Torrance refinery in L.A.

Two factors allow the price in California to spike much higher than the rest of the country. First, a different blend is required to meet California air quality standards. Second, there is little pipeline capacity (blue lines on graph below) to bring in refined product from elsewhere.

Major US Oil and Gas Pipelines

Major US Oil and Gas Pipelines - Key
Major U.S. oil, gas, and product pipelines. Source: World Factbook.

Earlier refinery disruptions, including BP's Whiting refinery in Indiana, Holly's Tulsa refinery in Oklahoma and ExxonMobil's Beaumont refinery in Texas, had also contributed last month to modestly higher prices outside of California than they otherwise would be.

The good news is that these kinds of disruptions are by their nature temporary; in fact, the Torrance refinery was back to normal operations by Friday. Based on the current Brent price below $112/barrel, I would expect a long-run average national retail gasoline price of $3.64/gallon, about 15 cents below where it currently is, and an average price in California of $4.04/gallon, about 60 cents below Friday's price.

On the other hand, sometimes people respond emotionally to this kind of situation. NBC San Diego reported "many rushed to fill up their tanks Friday night for fear of prices soaring again over the weekend." If enough people do that, it would produce a temporary spike in demand to run up against the temporary drop in supply.

It would also provide an instructive illustration of the economic problems that are introduced if speculators (in this case, California consumers) somehow get the notion that what they should do is buy more when the price is highest.

Though if that happens, my guess is that the buyers of the gasoline would blame somebody other than themselves.

By. James Hamilton of Econbrowser


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