Rising Prices of Calif. Crude Consistent with Market Changes -- GAO

Price differences between California heavy crude and benchmark West Texas Intermediate (WTI) are "consistent" with changing market conditions and apparently not the result of price manipulation, according to a Government Accountability Office report released yesterday.

Two California lawmakers had asked GAO to explore the issue due to concerns about possible price manipulation, which arose as the differential jumped in recent years.

The greatest rise in the price differential between California crudes and WTI began in mid-2004 and continued in 2005. The difference between the price of California's Kern River and WTI crude rose from roughly $6 per barrel to $15 in that period, GAO notes.

The differences between WTI and various California oils have fallen but remain high by historical standards, GAO says. The report tracked three California oils, the heavy Kern River and Thums, and the intermediate Line 63. The report concludes these changes are the result of several market trends.

The first is that in mid-2004 Middle East producers began increasing heavy crude supplies, which helped "depress" the prices of other heavy crudes, including California's, GAO notes.

In addition, the report says the U.S. Energy Information Administration noted that increases in global crude prices had caused the prices for light petroleum products -- including gasoline -- to rise more quickly than heavier products like residual fuel oil. That is because these heavier products compete against other fuels, including coal, that are not immediately affected by rising oil prices, GAO notes.

"As a result, prices for light crude oils, which produce greater amounts of lighter, higher value products, increase faster than heavy crude oils, which produce greater amounts of heavier, lower value products, and thus the price differential widens," GAO notes.

Between January 2003 and January 2005, WTI rose by about 42 percent while Kern River rose by about 16 percent, GAO notes.

Hurricane Ivan's role

The report also cites other factors, including 2004's Hurricane Ivan that disrupted the Gulf of Mexico. It notes some experts believe that scarcity of crude in the region caused prices for WTI and some other "regional oils" to increase relative to oils produced in California and elsewhere outside the area.

California officials have in the past expressed concern that the state's oil companies were manipulating prices to lower their royalty payments. Sen. Dianne Feinstein (D-Calif.) and Rep. Henry Waxman (D-Calif.) had requested the study in 2005.

Oil royalties are a significant source of revenues for California, the country's fourth-largest oil producing state. In fiscal 2006, GAO notes, royalties from production on federal lands in California provided the state with nearly $45 million.

The report says GAO investigators could not find "any evidence that any market players" had manipulated prices during the period of increasing price differentials. But GAO adds, "we cannot rule out this or other possible factors or events that we could not observe" that could explain some of the changes in price differentials.

The report also notes that there is some history behind the suspicions. It cites litigation that began in the mid-1970s and went on for two decades in which the state of California alleged seven producers had conspired to keep their posted prices below the true market value of their oil, thereby illegally reducing royalties.

Six companies settled while another went to trial and was exonerated, GAO notes.

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