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Ideas for Reformulating a Volatile Fuel Market

Taming pump prices will require curbing demand, boosting supply or changing the way the industry operates, experts say.

June 20, 2005|Gary Cohn and Elizabeth Douglass | Times Staff Writers

California Atty. Gen. Bill Lockyer has spent years examining the inner workings of the state's fuel business and thinks he's found a partial solution to expensive gasoline: Every time he starts up his hybrid Toyota Prius, he figures he's conserving.

"Doing something that expands supply and reduces demand is absolutely necessary," said Lockyer, who convened a gas-price task force in 1999 and once likened the state's refiners to the Organization of the Petroleum Exporting Countries oil cartel. Two years ago, Lockyer bought his black Prius, which runs on gasoline and electricity, to show his commitment to burning less fuel.

Taming California's energy prices will require using less gasoline and diesel, making or importing more fuel or tinkering with the way refiners and retailers operate, according to interviews with two dozen economists, consumer advocates, oil executives and government officials.

Expensive gasoline is a national problem, reflecting the steep cost of crude oil. But the situation is particularly serious in California, which has some of the highest gas prices in the United States because of a series of actions by regulators, oil companies, community groups and others. Step by step over the last decade -- starting with mandates for a special cleaner-burning fuel and adding in oil company mergers, community resistance to refinery expansions and unrestrained demand -- the Golden State's fuel business has been transformed into a kind of dream market for oil refiners.

The strains on California's fuel sector won't be easily fixed, the experts stressed. Some ideas are likely to be painful and politically unpopular.

Take taxes, which currently add about 55 cents to California's per-gallon gasoline cost, with 18.4 cents going to the federal government and the rest to state and local governments.

"If we were smart about this, we would increase the gas tax substantially -- that would reduce demand and get us back to a point at least for a while where we were able to supply our own needs for California," said Severin Borenstein, director of the University of California Energy Institute in Berkeley.

California Democrats took a different approach in April, proposing cutting the gas tax 11 cents a gallon and increasing the sales tax on everything else. Legislation has yet to be introduced.

"That's a really bad idea," Borenstein said. "Lowering the tax on gas is not a good response to the fact that we don't have enough gasoline."

But raising taxes isn't the right approach, said California Assembly Speaker Fabian Nunez (D-Los Angeles).

"I don't think it's fair to jack up gas prices and force consumers to take it in the shorts," Nunez said.

So it goes with most proposals to alleviate gas-price sticker shock.

And not everyone believes that drastic action is warranted. Joseph Sparano, president of the Western States Petroleum Assn., an industry trade group, said that California's fuel business worked pretty well. However, he acknowledged that some structural enhancements were needed to produce and import more petroleum and its products.

"The market's not broken, but the structure needs improvement," said Sparano, who advised easing refinery permits and expanding port fuel-importation facilities. "We need to have policies in California that promote investment, not create barriers against it," he said.

Any serious revamp, the experts agreed, must recognize the growing demand and tight supplies of the specially formulated fuel required to help clear up the state's polluted skies. Few refineries outside the state are capable of producing California gas.

The problem is both immediate and long term: A minor disruption at one of California's 13 gasoline-making refineries could immediately increase prices, and a serious one could send gas costs through the roof.

"If there was a major accident at one of the California refineries that took a refinery out of production for six months, you'd probably be dealing with gasoline prices that started with a $5," said oil economist Philip K. Verleger Jr.

The problem has been building for years and isn't going to go away as long as consumption continues to grow, according to the California Energy Commission and the California Air Resources Board.

"California faces a future of increasing petroleum dependence, supply disruptions and price volatility," the two agencies said in a 2003 report. The state Energy Commission has sent Gov. Arnold Schwarzenegger a series of recommendations to boost fuel production or reduce demand, including pressuring the federal government to require more fuel-efficient vehicles.

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