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Study Predicts More Volatility in Gas Prices

State's consumers are especially vulnerable to large, frequent spikes in how much they pay at the pump, according to Rand researchers.

August 28, 2003|Elizabeth Douglass | Times Staff Writer

A growing appetite for gasoline -- combined with scant prospects for an increase in refining capacity -- will keep fuel supplies and prices volatile in the coming decade, according to a Rand study being released today.

California and other states that require special fuel blends to reduce air pollution will be especially vulnerable to shortages, according to the study, which was commissioned by federal energy officials.

The findings largely represent the views of oil industry executives, who told researchers that they have little financial incentive to boost refining capacity. On the contrary, less competition and capacity in the refining business has contributed to higher profits, researchers found.

"Refiners suggested that there are opportunities out there for production expansions," said D.J. Peterson, principal author of the study.

But at the same time, he said, "refiners told us they no longer see an imperative to supply the market at all costs ... therefore, they no longer build in extra capacity."

One refiner quoted anonymously in the report said his strategy was to make "cheapskate investments" and rely on the existing plant and equipment as much as possible, even if that plan ultimately reduced the refinery's output of certain fuels.

Another person in the business said, "The industry has learned that it's OK to fall short on product ... there is no reward for being long on product or production capacity."

In California, where no new refineries have been built in 30 years, government officials say the state's precarious supply-demand situation leaves motorists vulnerable to more frequent and larger spikes in pump prices.

Gasoline prices in California are in their second major ascent of the year, having jumped nearly 36 cents a gallon in the last two weeks, to $2.101. The statewide average hit a record of $2.145 for a gallon of self-serve regular on March 17.

Such volatility is likely to hit with regularity in the future, and not just in California, refiners told Rand, a nonprofit research group in Santa Monica.

Authors Peterson and Sergej Mahnovski produced the report from interviews between February and July 2002 with 72 executives from large and small refiners and companies that supply services and equipment to the companies.

It was commissioned by the National Energy Technology Laboratory, an arm of the federal Department of Energy, to help the agency as it reviews government policies and programs that involve refineries as well as fuel and environmental regulations.

Many refinery executives complained that ever-changing regulations further discouraged investment in a business that was already challenging, risky and expensive. The number of U.S. refineries has declined from 324 in 1981 to 149 last year, according to the federal Energy Information Administration, although the ones in operation produce more gasoline.

State Assemblywoman Christine Kehoe (D-San Diego), who held a hearing Wednesday to discuss the lack of competition in the gasoline market, said there was little lawmakers could do to boost refining capacity.

However, Kehoe has proposed a bill, AB 1340, that would require California refineries to provide the state with detailed reports of imports, exports and inventories of fuel. She said that would give the public a better idea of the fuel supply situation, and shed light on oil industry actions that are "sometimes at the cost of consumer benefit."

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