THE BLOG

Will U.S. Attorneys Stop the California Gas Gouge?

05/26/2015 10:27 am ET | Updated May 26, 2016

Gasoline in California is one buck more per gallon than it is in the rest of America, thanks to low inventories and a series of suspicious oil-refinery shutdowns that drove huge first-quarter profits for the oil companies.

Our nonprofit Consumer Watchdog has asked California's U.S. attorneys to investigate.

Are California oil refiners manipulating gasoline supplies through shutdowns to drive pump prices and profits higher? Or, as some industry apologists say, are oil companies just in the right place at the right time?

Since the beginning of February, California's 14 oil refineries have suffered 10 serious slowdowns or shutdowns, many due to questionable causes or timing.

The timing of these overlapping outages raises questions about their true necessity, and about whether some refinery capacity may have been taken offline in order to drive up prices and profits for oil refiners at a time when some of their crude operations have been yielding lower profits.

Experts have publicly and privately stated that they have never seen so many refineries down for planned and unplanned maintenance at this time of the year.

Consumer Watchdog's letter documents the pattern of suspicious outages using information from industry sources, print media and trade publications, and from the Oil Price Information Service.

According our watchdog group's analysis, Californians paid $2.4 billion more for their gasoline than drivers nationally paid between February and April, based on the gap in pump prices. Southern California gas now costs $1.30 more than the nationwide average -- the widest gap ever recorded.

This is the only industry in America that profits more when its factories repeatedly break down or are taken down for "maintenance." Since four oil refiners control 78 percent of the gasoline market, such an oligopoly can easily withhold needed products to drive up prices.

The biggest evidence for U.S. attorneys to investigate are the oil executives' own statements.

Oil refiners in California credited large first-quarter profits to refinery problems and tight supply. Their company executives uniformly reported to investors on recent investor calls that the "maintenance" problems and other "disruptions" at their refineries have been a huge boon for the companies at a time when crude-oil prices are at historic lows.

Here are some of the executive' statements from May investor conference calls:

  • Jeff Gustavson, General Manager at Chevron: "Margins increased earnings by $435 million driven by unplanned industry downtime and tight product supply on the US West Coast."
  • Greg Maxwell, CFO of Philips 66: "First quarter gasoline cracks [difference between costs to make gasoline versus its wholesale price] for the Western Pacific region were $20.21 per barrel compared with $7.46 last quarter, resulting in record earnings for the region."
  • Greg Goff, CEO of Tesoro: "In California, crack spreads have improved related to the unplanned and planned refinery maintenance activities."

When oil-refiner profits are driven by planned and unplanned maintenance, and refiners determine the maintenance schedules, an investigation is warranted.

The combination of short supplies and refinery outages allows a handful of companies to make big profits at the expense of consumers. Notoriously secretive refiners do not publicly report outages and slowdowns, and even the California Energy Commission is not informed of planned and unplanned outages. Only unplanned outages that involve toxic emissions are reported to state authorities.

Consumer Watchdog's letter also pointed out to the U.S. attorneys:

The slowdowns and shutdowns also come at a time when the refiners' trade association, the Western States Petroleum Association (WSPA), had a tacit agreement among its members to work together politically to undermine new global warming limits in California by arguing that the measures raised gasoline prices.

An internal WSPA presentation made public in November by Bloomberg showed the companies intended to finance surrogate groups that would argue greater greenhouse gas emission limits in California under the new cap-and-trade program drove gasoline prices up 76 cents. With gas prices dropping precipitously in January, as the cap and trade program took effect, and following a historic drop in crude oil prices, the strategy could not be implemented. At state senate hearings in March, the oil marketers testified that cap and trade had no impact at the pump. Nonetheless oil refiners have blamed recent gas price spikes on the cap and trade program, raising the question of a political motive for the oil refiners to throttle back their refineries and drive up gas prices.

The political power of the oil industry over state officials, given the industries' huge political war chest and lobbying operations, requires an independent, outside investigation by the US attorneys' offices. Californians deserve real answers about whether oil refiners have created artificial shortages and scarcity to drive up gasoline prices.