SAN FRANCISCO: The explosion that shut a major Los Angeles oil refinery on Wednesday sent shockwaves through the local gasoline market, sparking higher prices, largely because California’s fuel infrastructure is isolated by geography and environmental rules.
Despite the shortage of easy fixes for a state that is seeing fewer refineries provide gasoline for millions, analysts believe pump prices will remain steady due to healthy stockpiles.
Immediately after Wednesday’s explosion at Exxon Mobil Corp’s 155,000 barrel a day refinery in Torrance, wholesale price differentials in the Los Angeles region hit a 19-month high amid heavy buying, underscoring the state’s delicate supply demand balance.
Unlike highly connected states on the East Coast, California lacks pipelines to carry gasoline into the state and instead relies on about 15 in state refineries to make the enormous amount of fuel burned every day in the auto centric state, which uses a tenth of U.S. gasoline, nearly 1 million barrels of fuel daily.
Further isolating California, the environmentally conscious state mandates the use of a less polluting blend of gasoline and diesel fuel, which few out of state refineries make.
Given its reliance on in-state refineries, an unplanned shutdown of gasoline producing units, like the one resulting from Wednesday’s explosion, can have a severe impact on California drivers.
Making matters worse, the refinery outage follows Tesoro Corp’s closure of its large Golden Eagle refinery in the San Francisco Bay Area due to an ongoing labor dispute.
Together, those plants produce about 17 percent of the state’s gasoline, according to U.S. Energy Information Administration data.
Gordon Schremp, a senior fuels specialist with the California Energy Commission, said that while wholesale gasoline prices have risen, healthy gasoline stockpiles and low seasonal demand will keep pump prices in check for now.
But the loss of another major refinery would put the state in a tight spot, he said, and its options for bringing more gasoline into California are limited.
NO EASY OPTIONS
California could build pipelines to other states to diversify its supply options, but Schremp said there is little interest on the part of energy companies to do that.
The idea of building a pipeline connecting Texas to California was floated and “no one wanted to do it,” he said.
Bringing gasoline by ship to the state is complicated, as it would require the changing of a longstanding federal law barring non-U.S.-built vessels from carrying gasoline from one American port to another. Gasoline can also be imported from Asian countries.
That law, known as the Jones Act, raises the price of moving fuel from a refinery in the Gulf of Mexico to California by three to four times more than it would be if foreign ships could be utilized, said Sandy Fielden, an analyst with consulting firm RBN Energy which provides information and analysis for energy market participants.
As a result, while Valero Energy Corp’s Corpus Christi, Texas, refinery can produce California-grade gasoline, it rarely ships to California because of the cost of transport.
California could also choose to relax its environmental standards and allow its drivers to burn more polluting gasoline imported from other states. That would require an executive order by the state’s governor.
Governor Jerry Brown has shown a willingness to change the rules in a pinch. In October 2012, when gasoline prices were nearing $5 a gallon, he permitted refineries to start making cheaper, more smog producing “winter grade” gasoline before the usual seasonal changeover.
Some experts say changes like that are mostly cosmetic, and it is unclear how much easing the rules would actually help the state in the event of a severe shortage.