On Tuesday, August 15, a top official at the California Energy Commission (C.E.C.) glossed over the results of an intensive three-month probe into gasoline price fixing that was ordered by Governor Schwarzenegger on April 24 of this year.

Commission Chair Jackalyne Pfannenstiel, a former energy industry employee, said the report uncovered no “smoking gun.”

This was the unfortunate headline picked up by the mainstream media, which was not given enough time to read the 87-page report prior to deadline. The next day, most of California’s major newspapers published the headline “No Smoking Gun.” The energy industry hailed the report and the Commissioner's statement as a “vindication.”

Don’t you believe them.

The commission may not have found a smoking gun, but to anyone who reads the report, there is a tremendous amount of smoke, blood, and bullets. This study amasses a huge body of circumstantial evidence that strongly suggests that California’s refineries have intentionally created shortages in gasoline supplies to drive prices higher using a broad array of techniques from "port congestion," to refinery shut-downs, and massive exports of refined products away from the State of California.

Specific findings include:

BULLET #1:
Unprecedented levels of “Unplanned Refinery Outages” - Perhaps the ugliest indicator of gouging is the fact that there was a 300% increase in "unplanned" refinery shutdowns that occurred from January through June compared to the same period last year -- 175 compared to 58. Even more alarming is the fact that outages not only tripled during the same time last year, they also lasted twice as long. Virtually every time a refinery has an unplanned outage, the cost of fuel surges. These price hikes are extremely profitable to the oil industry. According to the C.E.C., only 8¢ of the 44¢ increase in fuel costs can be attributed to higher oil costs. The damage is even higher in San Diego, where gasoline costs a dime a gallon more than the state average.

BULLET #2:
Outrageous profits above and beyond the cost of oil – The Commission estimated that after increased oil costs were accounted for, that California consumers paid $1.3 billion more for their gasoline in May, June and July of 2006.

This is money that went straight into the refineries’ pockets at a time when unplanned outages increased by 300% in California (see item 1 above). On a per household basis, the excess $1.3 billion in profits represents $108 per household.

BULLET #3:
Limiting refinery capacity - Refining capacity may have been deliberately curbed to create price spikes – The industry has routinely said that the reason gasoline costs so much is because it has not been allowed to build a refinery in 25 years. The reality is that California refiners have shut down three of their own refineries in the last ten years, forcing California to import much of its gasoline. What the study does not mention is that some refiners, most notably Shell, tried to close and demolish its highly profitable Bakersfield refinery in order to restrict supply in California.

BULLET #4: Aggressive Exporting
California refiners aggressively exported diesel out of state via pipeline at the height of the crisis. – UCAN’s survey shows that San Diego’s diesel prices reached an all-time record high of $3.427 a gallon on May 7, 2006. The C.E.C. report shows that at precisely the same time this record price was reached, California refineries had increased their weekly pipeline exports of diesel by more than 200,000 barrels to Nevada and Arizona, well above the average export levels over the previous five years. This spike in exports sticks out like a sore thumb on page 36 of the report. The study also shows that during this same time, a flood of diesel was pouring into Arizona from Texas at a rate of roughly 30,000 barrels a week higher than usual. The result of these exports was an all-time record high price for diesel.

BULLET #5: “Congested Ports”
One of the most extreme observations in the study is that congestion at ports caused shortages. The C.E.C. noted that Berth 118 in San Pedro Harbor, was especially congested from April 25 to April 29, when refined gasoline shipments bound for the Kinder Morgan pipeline system were delayed by up to three days from April 25 to April 29.

Clearly, the “delays” were harmful to consumers and highly profitable to Big Oil. UCAN’s data shows that on April 25, the price of gasoline had already reached a shockingly high $3.28 a gallon in San Diego. In the six days following Kinder Morgan’s “congested port” problem, the price of gasoline in San Diego screamed upward by 14.5¢ to a new record high of $3.425 a gallon.

What the study does not appear to examine is WHY the port congestion occurred. It is entirely possible that this “congestion,” which was highly profitable to the industry, may have been caused by heavy exporting activity with the intent of dumping fuel at a loss in foreign countries to restrict the supply in San Diego. According to a report on May 22, by the respected El Diaro news service, tankers brimming with refined gasoline were being exported to Mexico during the same time that the California gas prices were at record levels. At the time the story was written, gasoline in Mexico was selling for up to dollar a gallon less than in San Diego. Clearly, fuel was being dumped at a loss.

These are just a few of the findings in the report. To any reasonable person, they strongly suggest that something is seriously wrong with California’s gasoline infrastructure. As for the lack of a “smoking gun,” the Commission lacks the legal authority to gather any meaningful evidence. Commission staff has asked for additional data-collection powers including the ability to audit financial and cost data monitor wholesale markets, and collect data on harbor activity.

Empowering the Commission with the ability to collect accurate information from the oil industry will help identify gasoline production bottlenecks and give the Commission the investigative authority it needs to find the “smoking gun.”

In the meantime, the alarming evidence unearthed by the Commission staff should not be ignored. Free markets depend on free an open competition. This report shows a market similar to the electric markets of 2001 where a handful of producers simply restricted supplies in order to drive up the price of electricity. It appears that the same strategy is being used for gasoline.

SOURCES:

FINAL Report to the Governor: Spring 2006 Petroleum Fuels Price Spike, Energy Commission publication # CEC-600-2006-012, posted 8/15/06. (PDF file, 94 pages, 3.0 megabytes).

* See Clark University News Briefs.

1 Based on U.S. Census data estimating 11.7 million households in California. The damage to San Diego consumers is even higher, because our prices peaked at a level that was ten cents a gallon more than the statewide average.

2 See U.S. Newswire: “Shell to Demolish Profitable Refinery.

3 For documentation of fuel dumping to restrict California supplies, see May 22, 2006 El Diaro news service, (Spanish), the April 25, 2001 Oregonian, and the August 22, 2004 Orange County Register.