Gas prices highlight California’s energy vulnerabilities

California is being reminded again of the volatility of its energy supply as shutdowns at several oil refineries have pushed gas prices higher, including to all-time highs in Los Angeles on Monday.

At least five plants recently faced maintenance shutdowns or slowdowns, restricting supplies of California’s special gasoline blend mandated to reduce pollution.

And in contrast to this summer’s nationwide rise in gas costs — driven by high oil prices and a surge in travel — the recent rise in gas prices is unique to California and some of its western neighbors, underscoring once again the fragility of the state’s energy markets in transition.

While Gov. Gavin Newsom last week responded to soaring fuel costs by accelerating the state’s switch to its cheaper winter gasoline, energy experts say it could be weeks before drivers at the pump experience any real relief.

“We’re operating in a…narrow market now,” said Shon Hiatt, an associate professor of business administration at USC with a focus on the energy industry. “So if a refinery does maintenance, prices will go up because we don’t have a lot of wiggle room.”

California has been quick to move to reduce its reliance on gasoline vehicles, including a recent decision to ban the sale of new non-electric vehicles by 2035 and a proposal that would do the same for large diesel vehicles by 2040.

All of this is part of a larger effort by the state to lead the fight against climate change and the transition to alternative fuels.

But for now, gas vehicles still dominate, and the state still has a long way to go to strengthen its electric grid. This summer, a record-breaking heatwave pushed the power grid to its limits, narrowly avoiding rolling power outages.

California is now in an energy transition period.

As more oil refineries have gone offline in recent years — 14 today compared to almost 50 a few decades ago — California is becoming precariously dependent on the few that remain given the state’s stricter gasoline requirements compared to the rest of the United States are operational, said Severin Borenstein, director of UC Berkeley’s Energy Institute at the Haas School of Business.

“The reality is that as gasoline is phased out, we’re going to have fewer and fewer California refineries making this blend,” Borenstein said. “And that’s going to make us more and more vulnerable to the fact that if a refinery goes down unexpectedly, it’s going to have a big price shock.”

In the last week, California gas prices have seen their steepest rise in the US, rising 59 cents on Monday to average $6.38 a gallon, according to data from American Automobile Assn. Only Alaska came close behind, up 54 cents over the same period, although other western states also saw notable increases.

The average gas price in Los Angeles hit a record high of $6.47 on Monday, just surpassing records set earlier this summer, according to the AAA. All-time highs were also hit Monday in Riverside County at $6.33 and San Diego at $6.40. And over the weekend, records were also set in Orange County at $6.43 and the Santa Barbara-Santa Maria metropolitan area at $6.38.

Gas prices started rising in late September after nearly 100 days of decline. Prices have risen steadily since then, with California drivers now paying an average of $1.10 more for a gallon of regular gasoline than a month earlier.

California has consistently led the nation in gasoline prices in recent years, its peak price being fueled by state environmental laws and motor fuel taxes, as well as the special gasoline blend required in the warmer months.

Oil refineries must follow specific gasoline formulas aimed at reducing high temperature air pollution and alleviating atmospheric smog. But those restrictions also mean that California can’t rely on its neighbors when the state’s gasoline production runs out or refineries close.

“It’s a huge problem because we have such a tight supply-demand balance,” Borenstein said. “Of course we want to lose it at some point if we run out of gas. But if we lose it too soon, we’re really vulnerable to any kind of unforeseen supply-demand shock.”

It wasn’t immediately clear which refineries across the state were experiencing short-term outages in recent weeks, either for planned or unplanned maintenance, but a statement from the California Energy Commission said “refining production problems” were being recorded in both northern and southern California. A spokesman for Phillips 66 confirmed that its Los Angeles-area refinery will undergo scheduled maintenance beginning Monday.

Eleven of the state’s refineries produce transportation fuel that meets California gasoline standards, according to the CEC, and supply gas to the entire state and most of Nevada and parts of Arizona. CEC officials said some of the recent refinery work affecting gasoline supplies has been completed, but much is still ongoing and will not be completed until later this month.

Patrick De Haan, a petroleum analyst at GasBuddy, called the West Coast the “epicenter” of recent gas price hikes, which have pushed up the national average, though parts of the Gulf and East Coast have seen pump prices fall. As oil prices have remained steady lately, De Haan said refining issues are “at the forefront” of current market shifts.

He said at least five refineries in California have experienced disruptions.

Hiatt said most California refineries didn’t take time for scheduled maintenance this spring because the oil and gas industry was booming, which worsened the timing of those outages. With no oil pipelines to bring in products from outside and no strict restrictions on imports, he called the state a “fuel island” and said he worries what might happen if more refineries shut down.

“We don’t have any resilience,” Hiatt said. “I think we’re really in a tricky period now where we have about as much supply [as needed] to meet demand.”

Kara Greene, a spokeswoman for Western States Petroleum Assn., which advocates for the oil and gas industry, said the state’s “inhospitable policy” on oil and gas is making it difficult to continue providing products that Californians use to commute and travel need – and understandable when refineries are closed.

“These companies don’t just produce the energy [Californians need]…they’re fighting for their license to operate,” Greene said.

However, Newsom blames oil companies for rising costs in California. He said in a Videos on Twitter on Friday that oil companies continue to raise prices and offer “no explanation” as to why. The state’s Energy Commission also questioned oil industry executives about how supply levels have fallen so far as refiners have braced themselves for such maintenance problems in years past.

Newsom pointed to the sharp disparity in gas prices between California and the rest of the country. The national average for a gallon regular was about $3.79, or $2.58 below the California average.

“The degree of divergence from national prices has never happened before,” Newsom said in the video. “The fact is [oil companies] rip you off.”

Newsom’s decision to switch to the state’s winter mix earlier could increase supply by 5% to 10% in the coming weeks, Borenstein said, but he didn’t expect big price drops immediately.

“I think we’re going to see prices leveling out in California over the next day or two,” Borenstein said. “But I don’t think we’re going to see big drops in the next few weeks.”

Borenstein said he would like to see state officials adopt a more forward-looking, long-term plan to prepare for unplanned fuel supply issues, otherwise such situations would continue to cycle.

“We need to take this seriously, instead of just reacting when we get a price hike,” Borenstein said.

But if that doesn’t happen, consumers may have to get used to these spikes in pump payments, according to Hiatt – similar to how the risk of power outages during extreme weather has become increasingly common. Officials have also proposed changes to state and federal laws aimed at reducing gas costs for consumers, but it would be a while before a new California tax or statewide oil reserves could be introduced to provide financial relief — if any of the both ideas make it through the legislative process at all.

“I think in California … expect volatility,” Hiatt said. “Legislators have developed a policy over the past 15 years that focuses solely on reducing CO2 emissions, neglecting reliability and prices, both for liquid fuel – the kind that fuel cars – and electricity.”

Times contributor Salvador Hernandez contributed to this report.

https://www.latimes.com/california/story/2022-10-04/california-gas-prices-soaring-and-there-is-not-much-officials-can-do-about-it Gas prices highlight California’s energy vulnerabilities

Alley Einstein

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