Currently, California has 11.4
million barrels of gasoline in storage. That's 51 days supply, assuming demand does
not increase and assuming the gasoline in storage could be completely depleted. However, about
46% of the gasoline in storage is blendstock and it is not likely that it can all be used
to make gasoline compliant with air quality regulations, thus reliance on a 51 day supply is not
a good idea. Instead, it may be more appropriate to assume that only about 50% of the blendstocks
are readily available, thus decreasing the available inventories to 8.7 million, or 39 days
supply.
Refineries are operating at near maximum capacity, so the options are 1) to operate at levels
above rated capacity, which puts refineries at risk of accidents, 2) increase prices high enough
to decrease demand significantly, or 3) modify gasoline quality requirements and bring in imports.
Unfortunately, even if the third option occurs, it will take at least 2 weeks to get gasoline to
California since there are no product pipelines that deliver to California.
The California Energy Commission has activated the Verification Phase of its
Energy Emergency
Contingency Plan. This action is warranted. Although it appears that the supply will be
adequate if refinery capacity comes back on line, there remains
a chance the supply situation will not recover or that another refinery problem may arise. California
does not have the excess capacity that exists in other markets. So many refineries have shut
down in recent years that we are dependent on the continued operation of all of the remaining
refineries. At times like these, it is smart to keep a close watch on what is going on.
And then there is also the problem of skyrocketing prices. One reader reported this weekend that
the price of gasoline was $1.91 per gallon near the Chevron, Richmond refinery. It is true that the logistics of
getting gasoline from Southern California to Northern California, and delivering to
non-routine retail stations may
interfere with the smooth flow of gasoline and probably encourages increased pricing, at least
temporarily. And it is also true that if the prices increase to above about $1.35 per gallon for
regular, some people alter their driving, and demand decreases.
For now, it appears that California's refineries are simply taking full advantage of the
situation and have increased gasoline and diesel
prices well beyond the levels justified. But then, this is a free market where price spikes are
bound to occur. A few years back, the California Energy Commission (CEC) prepared a report on the
possibility of creating a strategic product reserve just for occasions like this. At the
conclusion of the study, the CEC decided that the investment was not warranted.
In a free market, competition for the shifting market shares should
slow down the rising prices, and eventually reverse them. Will it happen in California? While we
wait, some oil companies are raking in the bucks.
Weekly Report
Crude oil prices continue to rise,
primarily on speculation that OPEC will carry through with its plan to reduce the world supply of
crude oil. Meanwhile, the U.S. did not help the situation last week. Demand for crude oil was
down. Refinery inputs were slightly lower at 14.2 million bpd, and imports of crude oil dropped
1.17 million from 9.04 to 7.87 million bpd. Despite the decrease in imports, crude oil inventories
increased by 2.8 million barrels to 340.8 million, which is just 11.9 million below maximum capacity.
And although crude oil prices have increased, refiners are still refining cheap crude oil, as shown
in the following graph.
