Having One's Gasoline, and Burning It, Too

Higher West Coast motor fuel prices, particularly in California, are the result of higher world crude prices, refining capacity shortages, withheld production, ... and attitudes.

Shell Oil Products-US' decision to close its 72-year-old Bakersfield, CA, refinery by October 1 is producing shrill resonation all along the Pacific Coast.

In making its announcement last November, the Shell Oil Co. unit said heavy oil production from California's San Joaquin Basin--the refinery's original raison d'etre--is depleting to the point that the plant would no longer be economically viable beyond the third quarter of this year. The refinery produces mainly gasoline and diesel fuel refined from the goopy crude oil that dominates the oil found in the area around Bakersfield, of which Shell itself is a major producer.

The San Joaquin production decline is plainly evident. For one thing, larger companies have been selling off producing properties there to smaller companies for years. What's more, the state's Conservation Dept. says oil production from Kern County, the leading oil producer in the area, has declined steadily, falling in 2002 to its lowest point in more than 20 years, And while complete figures for 2003 are not yet final, there's no indication that the downward spiral will end anytime soon, if at all.

But at least two U.S. senators are calling for a federal investigation of the refinery closing, alleging that Shell (and by implication, the rest of the state's refiners) is working to ensure that West Coast gasoline prices--historically the highest in the nation--continue to stay that way.

As usual, fuel prices along the Pacific Coast are indeed higher than the national average.

The American Automobile Assn.'s daily "Fuel Gauge Report" says the average U.S. per-gallon price paid for regular unleaded gasoline on March 1 was about $1.72, bringing it to its highest point in a decade.

At the same time, however, drivers in Oregon and Washington paid nearly a dime more for their motor fuel, and Californians plopped down nearly 40 cents per gallon more than that.

Drivers in the Golden State paid a March 1 average of $2.11 per gallon at the pump, with San Franciscans topping that at $2.16 and Los Angelenos forking over $2.18--the highest for the state's metro areas.

It seems as if California's tale of woe, which started with the infamous electric power deregulation debacle of 2001-2002, is long from being over. The government is nearly broke, with much of a multi-billion-dollar deficit caused by state-enacted electricity price caps for citizens. But despite a new governor who promises to fix it all, things remain grim in California: Now comes the gasoline price debacle.

Probably nothing short of empathy could be felt for average California wage-earners, who must travel long distances to and from their jobs, and for its small business owners, who depend largely on the trucking industry for their survival. A 40- to 50-cent-per-gallon price hike for motor fuel makes a serious dent in any already strained pocketbook.

But the Bakersfield refinery supplies only about 20,000 barrels per day of gasoline, or barely 2 percent of the state's total retail gasoline sales, and some 15,000 barrels per day of diesel fuel, or about 6 percent of in-state sales. The brunt of California's--and Oregon's and Washington's--motor fuels are refined by a number of much larger plants in the Los Angeles, San Francisco, and Seattle areas. The company says that to supply its branded customers, it will make up the Bakersfield output with increases from two other California refineries--at Wilmington near Los Angeles and at Martinez near San Francisco--and from its Puget Sound plant at Anacortes, WA.

The Bakersfield refinery was built in 1932, and while it has been expanded somewhat over the years, it's been described as the least-profitable oil refinery in California. Its layout is awkward, as well, being located on three separate parcels of land, none of them contiguous. Shell has owned the plant outright for only a short time, having acquired it from Texaco in 2001 when that company merged with Chevron. Prior to that, a Shell-Texaco partnership owned it, but a consent degree based on competitive issues ruled that for the merger with Chevron, a major refiner, to be approved, Texaco had to divest itself of all downstream holdings.

Shell says it plans to tear down the Bakersfield plant completely after the closing, noting that any prospective buyer would be faced with the same supply shortfall problems. Refitting for lighter crudes, at least in Shell's viewpoint, wouldn't be viable economically.

But Senators Barbara Boxer (D-CA) and Ron Wyden (D-OR) have called for investigations of the closing and Shell's motive for doing so. Both long-time opponents of the petroleum industry, Boxer and Wyden suspect market manipulation, and each has written a separate letter to the Federal Trade Commission asking for a formal inquiry. The FTC has not yet announced anything.

However, this follows a report released just last May by the California Energy Commission that found the state's gasoline market to be functioning "appropriately." Former Gov. Gray Davis initiated that investigation.

The worldwide price of crude oil is today at one of its highest peaks. That's translating into higher refined product prices across the entire nation. However, the motor fuels problems in California, Oregon, and Washington are worsened considerably by their similar tough environmental stances and complicated industrial permitting regimes, which are designed, some say, to delay the addition of new refining capacity inside their boundaries or to prevent it altogether. Like it or not, no new refining capacity has been added in California since the late 1950s.

Meanwhile, much of the crude oil feedstock for West Coast refineries arrives by pipeline or tanker, which adds to the wholesale price. The states' "unique" clean fuel specifications also attach cost pass-ons. And because out-of-state refiners are at or near full capacity in producing fuels for their traditional markets, they are discouraged from blending gasoline specifically for the California market on an ongoing basis.

From the supply standpoint, the still-promising oil and gas production potential, at least in California, that exists beneath both state and federal offshore waters has been stymied for decades by state and federal regulators and by the influence of the state's formidable environmental lobby.

Add to all this the burgeoning use of fuel-inefficient vehicles everywhere in the country, but more so in California, and the results are pretty obvious.

California's new governor has called for more business-oriented legislation and has state regulators looking into simplifying the industrial permitting process. So, the state's economy may start to improve in the next several years, though nobody's encouraging new refining capacity additions or advocating renewed offshore petroleum development. Yet, projected vehicle additions promise to double the state's current count by 2010.

More efficient and environmentally friendly refining technologies are being developed in this country and abroad, and plans are to test several of these in California, particularly on the type of heavy oil produced by San Joaquin Basin wells. Proving these technologies, gaining the permitting necessary to install them in meaningful volumes, and actually producing motor fuels for the West Coast market will depend a great deal on future attitudes.

Meanwhile, somebody just might pick up the Bakersfield refinery and re-tool its process for treating some of the lighter crudes--say, those from the Elk Hills area, where Occidental Petroleum and Chevron-Texaco are dominant producers.

But in the end, the responsibility for the West Coast's higher-than-national gasoline prices has to be laid on the states, themselves. Having one's cake and eating it, too, has always been impossible.


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