Head to Head: Should the FTC investigate potential manipulation of the gasoline market?

Published: Thursday, Oct. 11, 2012 - 12:00 am | Page 17A
Last Modified: Sunday, Oct. 14, 2012 - 11:24 am

THE ISSUE: California gas prices jumped 49 cents in a week, according to AAA, to an all-time high of $4.67 per gallon for regular gas. There has been no similar spike in gas prices nationwide.

Join Ben and Pia as they continue the debate online at www.sacbee.com/opinion.

Pia Lopez: Yes

Californians normally have higher gas prices than the national average.

Our topography – mountains trapping air in valleys – means we have severe air quality problems. Nine of the nation's 10 smoggiest cities for ozone pollution are in California.

So the state takes strong measures to reduce smog. That includes requiring a California blend of reformulated gasoline (CaRFG) that has brought substantial declines in ozone concentrations since 1996. It also includes a higher-than-average state gas tax of 48.6 cents per gallon (second to New York with 49 cents a gallon).

But Californians do not – and should not – expect gas prices to skyrocket 50 cents per gallon in one week.

What is going on?

Chevron closed the crude oil unit of its 245,000 barrel-a-day refinery in Richmond after an Aug. 6 fire and now says it will remain closed through the end of the year.

Chevron also shut down its 85,000 barrel-a-day KLM pipeline from the San Joaquin Valley to refineries in the Bay Area on Sept. 19, saying it had detected elevated levels of organic chloride. No date has been set for reopening.

A power outage on Oct. 1 stopped production at Exxon/Mobil's 149,000-barrel-a-day refinery in Torrance – which, incidentally, was shut down for a week in late September. That refinery has reopened.

Phillips announced last Thursday that its 120,000-barrel-a-day refinery in San Francisco was going "to reduce production for an unspecified amount of time due to planned maintenance," according to the Wall Street Journal.

Coincidence? Perhaps.

In calling for a Federal Trade Commission investigation, Rep. Henry Waxman, D-Los Angeles, wrote: "A decade ago, market manipulation by Enron sent California's electricity prices soaring. While we do not know whether this is a parallel situation, we must make sure California consumers are protected."

Sens. Dianne Feinstein and Barbara Boxer also have called for investigations.

Of course, we hear the usual cries to eliminate California's special gasoline requirements. But that misses the point.

Regarding the current price spike, we should all be asking: Is there a true scarcity of supply?

Or are refiners using problems at a couple of refineries as an excuse to raise prices?

Are they deliberately driving up prices by withholding supplies from the market?

More generally, are refiners charging prices much greater than cost for cleaner-burning CaRFG?

All that is worth investigating.

And state legislators should explore a full range of contingency plans to deal with shortages, including a new look at the idea of a strategic fuel reserve to insulate Californians from refinery outages or other supply interruptions.

Over the long term, we should redouble efforts away from our reliance on oil-powered transportation – and toward alternatives, such as electric cars, transit and high-speed rail.

Pia Lopez is an editorial writer at The Bee.

Ben Boychuk: No

You can bet the cost of your next trip to the pump that federal investigators will find no evidence of illegal collusion or price-fixing by Big Oil in this latest gas price spike.

They're almost certain, however, to find at least one law worked exactly as intended: the law of supply and demand.

Instead of launching yet another investigation, why don't Feinstein, Boxer, Waxman and their Democratic comrades hold a celebration?

Sky-high gas prices are the direct result of four decades of cutting-edge environmental rules and regulations. You take the good, you take the bad.

As Pia correctly notes, California is unique among states, and a forerunner in setting stringent environmental and air quality rules.

The specially formulated summer blend of gasoline that fell short in supply this month dates to Gov. Ronald Reagan's administration.

Certain trade-offs may be worth the higher price. Although the summer formulation is more expensive to produce, California's air is certainly cleaner than it used to be. I remember the first-stage smog alerts of the 1970s and early '80s, and I'm not nostalgic for those days.

For some progressives, gas prices aren't nearly high enough.

California's High-Speed Rail Authority, for example, assumes its pipe dream of a project will eventually turn a profit in part because gasoline will one day become prohibitively expensive. In fact, most of the arguments for alternative fuels assume petroleum will no longer be cheap or readily available.

Truth is, California's current oil infrastructure is near the breaking point. We haven't had a "new" refinery come on line since 1979, when we had roughly half the current population – and that one was an expansion of an existing facility near the ports of L.A. and Long Beach. Given current state and federal regulations, building a new refinery is simply too expensive to contemplate.

The proximity of many our gas refineries to the ports is no accident, either. California is what energy economists call a "fuel island," relying exclusively on foreign imports.

Ironically, the Golden State is sitting atop an ocean of oil. Never mind offshore drilling. According to the federal Energy Information Agency, the Monterey shale formation that stretches nearly the length of the state contains at least 15.4 billion barrels of recoverable crude. That's four times the amount of oil fueling North Dakota's boom.

As my colleague Tom Gray points out in the summer issue of City Journal, California's "vast onshore oil reserves are underused, thanks to a green-energy agenda that raises the cost of oil production and refining. Policymakers have to realize that their quixotic quest to outgrow fossil fuels isn't helping the state."

What we lack are not resources, but the willingness to develop them.

Hence, higher gas prices indefinitely. Enjoy the progress.

Ben Boychuk is associate editor of the Manhattan Institute's City Journal. (www.city-journal.org/california)

© Copyright The Sacramento Bee. All rights reserved.

This editorial was modified from the original to clarify the unit that Chevron shut down.

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