Wednesday, October 10, 2012

Californians Are Special

As a proud Californian, I like to think we're ahead of the curve on a lot of things. This is the land of innovation where many national and international trends get started, so indeed we here in California are special. But not everything about being special is good. Last week I was in Las Vegas, where I paid about $3.60 for a gallon of gasoline. Then I come back to Los Angeles to find gasoline priced a dollar higher at $4.60 per gallon. Besides hearing rightfully outraged consumers being interviewed on the radio and television, the airwaves have also been full of politicians expressing their outrage and promising to get to the bottom of the mess, implying collusion, profiteering, and other dastardly behavior could be to blame.

However, there is no conspiracy theory to be proved. This is just a matter of California being special. Specifically, the problem is California special blend gasoline. California has mandated that only special blends of gasoline may be sold within the state to minimize air pollution. Indeed, there are two special blends, one for winter and one for summer use. Gasoline sold in most of the rest of the United States is unfit for use in California. What this means is that California gasoline is a specialty product, which is only manufactured by a small number of refiners. So if the regular source of gasoline sold in Nevada is knocked off line, it can be easily replaced by other gasoline on the market, with little disruption in supply or price. But when one California gasoline refinery goes off line, like the Chevron refinery in Richmond which has been closed for months by a fire, there is a measurable effect on supply and price. And when there is a second disruption like the Exxon plant power failure last week, the effect is magnified. So it's no mystery what caused the price spike in California gasoline--it's the mandatory special California gasoline requirements imposed by the state of California. The politicians all know this is what is going on, and they are just pandering to the public who is unaware of the economics involved.

Now given the precarious supply situation in California, the conspiracy theorists strongly suggest that California gasoline refinery problems are actually orchestrated to restrict supply and jack up prices. However, the fallacy in this assertion can be easily demonstrated by the fact that the producer whose facility goes off line does not benefit from the higher prices, since the producer doesn't have any gasoline to sell at the higher price. Does anybody really think Chevron is happy that their refinery is going to be closed for several months before reopening while everybody else's refinery is in full operation? [Update: Chevron's quarterly earnings were down 33 percent.} But everybody loves a conspiracy so this point is never raised.

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