Gas Price Panel Ponders Refiner Market Power With Summer Prices Set To Sizzle

It's probably hard to feel the sting of state gasoline prices, that are 70 cents per gallon above US prices, when you are in an ivory tower.  Perhaps that's why some of the academics on California Energy Commission's Petroleum Market Advisory Committee (PMAC) are taking a slow train to recommendations about how to fix the Golden State gouge that's been causing pain at the gas pump for the last year.  

Friday's meeting of the PMAC featured a robust exchange about the needs for transparency in the gasoline market, including Consumer Watchdog's presentation about why sunlight is the best disinfectant for abnormally high gasoline prices in California.

We made the case (watch the presentation below) that if the market had known Exxon's Torrance refinery would have been out for more than one year, importers and traders would have worked to replace the 20% of lost gasoline supplies in Southern California. Instead, misinformation from Exxon about Torrance's reopening led to profiteering and opportunism by refiners, who knew the situation, but kept the rest of the market, the public and regulators in the dark.

 

We argued drivers would be better off had oil refiners been required to report the reason behind refinery outages, estimated up-times, large trades of gasoline, wholesale gasoline prices, and imports and exports. Such transparency in the industry:

•    Creates more opportunities for additional traders and importers to participate in the market;

•    Empowers branded retailers to demand competitive pricing from refiners;

•    Guards against predatory exports that short a short supplied gasoline market

•    Gives regulators and anti-trust enforcement officials tools to understand anti-competitive pricing in real time.

A majority of the PMAC members seemed to agree that  transparency would help but did not see it as a fully solving the market's problems.  They opted to study more alternatives before making recommendations and to put a call out for a set of academic papers on the market power of oil refiners to be presented at a Fall workshop at the CEC.

Two economists, Severin Borenstein and Amy Jaffe, took to task the Western States Petroleum Association's (WSPA) consultant, Skip York, for misrepresenting European laws that actually require adequate inventory levels when he gave the impression they didn't.  As a result, the Committee is dedicating a future meeting to the question of whether California should require oil refiners, similarly, to hold a certain amount of gasoline in reserve, a position long advocated by Consumer Watchdog, or have an inventory plan to back fill lost supplies.

Attorney General anti-trust chief Kathleen Foote suggested the Committtee, if it was unable to make recommendations on policies, could at least make some on  market power by oil refiners. That led the third economist, Jim Sweeney of Stanford, to suggest the go-slow approach to seek new research papers on whether oil refiners were abusing their market power.  

Four oil refiners control 80% of the gasoline market. The refiners made more profits last year in CA than ever before.  Seems like a big, "Duh," to me and most California observers that they abuse their power by charging $1 more per gallon than they did in the rest of the nation for the majority of 2015 and pocketing the extra money themselves. But the CEC will be calling out for papers to prove what economists think happened in the market and convening a workship in September/October, after drivers in the state are pillaged for another summer by the oil refiners. 

Fireworks flew too when John Faulstitch, a former Exxon Mobil Torrance refinery manager, said there was essentially an algorythm that was programmed into the refinery so that certain gasoline output would maintain a certain price. Borenstein inquired about the modeling program and Jaffe asked Faulstitch a killer question: if a refiner for political reasons wanted to keep gasoline prices 70 cents above America's, hypothetically, could it program the refinery output through the algorhythm to do that.  Bloomberg reported in November 2015 about an internal WSPA presentation that showed oil refiners were going to argue to discredit cap and trade that gasoline prices would go up 70 cents.

Faulstitch hesitated to answer, making clear he did not work for Exxon anymore, and that his answers were his own. He then indicated anything was possible.

The voluntary committee is a diligent bunch, but the pace of their deliberations given the urgency for Californians is frustrating. Californians paid $10 billion more for their gasoline last year due to the oil refiners' profiteering.  The ripoff has been well documented: from shorting the market for months at a time to manipulating Southern California branded station prices, which oil refiners control in 80% of in Southern California, to failing to balance imports and exports with depleted supplies.  Another six months of academic exercises isn't going to help the state get to the solutions we need in time for the next ripoff to be prevented.

The political lines are clear on the five member committee.  Stillwater Consulting's Dave Hackett and Stanford's Sweeney are the oil industry free market proponents.  Jaffe and Foote have seen enough ripoffs to know when one's happening. Borenstein, the Chair, walks the middle ground. He's dedicated the next meeting to a discussion of whether to allow oil refiners to pay more to violate the special "CARB" specifications for California gasoline. He argues that will avert shortages by deterring misconduct but having a relief valve for short markets if it is necessary, only at a cost to refiners. Environmentalists are likely to have something to say about the proposal, as will the Air Resources Board.  It will generate a healthy dialogue within the next two months. But while the state panel talks, oil refiners get richer and drivers get poorer. '

Summer drive time is around the corner and the extraordinary delta between US and California prices is likely to remain, and possibly grow, even as the Torrance refinery comes back on line, in the new hands of new California refinery PBF, which bought the facility from Exxon.

The panel is proving far more patient than the public. We'll see how long that lasts with summetime gasoline price mischief moving in fast. 

Capitol Watchdog is owned and operated by nonprofit Consumer Watchdog. For more information about Consumer Watchdog visit http://www.consumerwatchdog.org

 
 

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