Why are natural gas prices so high and supply so volatile in California?

Over the past two decades, California officials have repeatedly warned that the state’s unique gasoline blend is vulnerable to supply shortages and soaring prices.

But despite multiple reports and special committees, California has struggled to find solutions as it tries to rapidly reduce its reliance on fossil fuels.

Motorists have seen record prices in an increasingly fragile gasoline market in recent weeks as near-half of the state’s refineries have experienced recent or ongoing power outages that have driven West Coast gasoline supplies to their lowest levels in a decade. Got a reminder.

However, national leaders are far from a comprehensive solution.

“We have to have a long-term plan, not wait until a crisis hits,” said Severin Borenstein, director of the Energy Institute at UC Berkeley’s Haas School of Business, who served on the statewide committee in 1999 and 2015. The aim is to find possible solutions to the state’s volatile fuel market.

None of them were implemented, he said.

“There are some things we can do to calm volatility in the gasoline market,” Borenstein said, “but it will take some public policy.”

State leaders and energy companies find themselves balancing California’s aggressive green energy goals while providing affordable, reliable energy during this transition period.

“Do I have new infrastructure fast enough before I rip out the old infrastructure, and what happens if you’re in the middle?” Managing Director of the Climate Policy Lab at Tufts University and former Energy and Energy Co., Ltd. at UC Davis said Amy Myers Jaffe, Executive Director of Sustainability.

“What we do now is let the cost of fuel go up and then we leave the poor with nowhere to go… and then [California leaders] Against the oil companies – this is not the solution. “

Same problem… Twenty years later

Gov. Gavin Newsom’s decision last week to switch early to the state’s easier and cheaper winter fuel blend was seen as a slight relief to gas stations. But experts say acting alone will not correct the situation that keeps reaching crisis levels. The average price of a gallon of gasoline in California is still well over $6, according to the AAA, about 70 percent higher than the national average.

“The state has set ambitious goals for the energy transition, but it hasn’t been well planned,” said David Hackett, chairman of energy group Stillwater Associates. He said that if policymakers or businesses don’t act, the past few weeks’ High oil prices could be an “early warning system” for California’s fate.

In 2015, the state’s oil market advisory committee, where Hackett, Borenstein and Jaffe were serving, focused on three spikes in gasoline prices and how officials could “reduce California’s impact on such events,” the final report said.

Although the committee’s conclusions are not specific, the report “strongly urges[d] The state builds organizational structures and devotes resources” to further study these issues. Many of the ideas reflect recommendations made nearly 20 years ago by the California Attorney General’s Natural Gas Pricing Task Force, such as building gasoline inventories, improving refinery transparency, and addressing market pressures. Relax some environmental requirements when increasing.

Gasoline reserves, run by the state or the refiners themselves, could help reduce price spikes by stabilizing inventories, Jaffe and other experts said this week. Many European countries, Japan and South Korea require refiners to maintain certain inventory levels, something the Biden administration has also recently proposed.

Other countries “don’t wait for the trading community to find it profitable to hold inventories, they are asking refiners to hold minimum levels of inventories,” Jaffe said. “I’ve been saying for a decade that we need to do this in the U.S., and of course I’ve said it needs to be a requirement in California.”

The Attorney General’s 2000 report on gasoline prices cited “state-owned gasoline reserves” as a possible option to “mitigate price spikes.” State leaders and experts then named “relative lack of competition” among refineries, supply constraints on California’s “unique clean-burning gasoline” and higher state taxes as three main factors driving prices up – analysts today The main point of the citation continues.

Andrew Lipow, president of consulting firm Lipow Oil Associates, agreed that crude and natural gas reserves like the U.S. could help, but said another way to cut costs would be to relax some of California’s stricter rules on fuels in an emergency, despite that. With environmental trade-offs.

Other ideas, such as building more refineries or a new pipeline to California, stand in stark contrast to the state’s goal of weaning itself off fossil fuels and related infrastructure.

A greener option would require changing a decades-old federal law that allows only “Made in America” ​​ships to transport cargo between U.S. ports, forcing California to rely on gas when gas supplies run low, Lipo said. Foreign imports, fees.

But Jaffe said the state most urgently needs to find comprehensive solutions to its current dependence on gasoline, such as investing in public transportation, new technology and affordable housing, while using short-term options such as gasoline subsidies and incentives to help make it happen Goal. She supports the state’s ambitious goal of banning the sale of new non-electric vehicles by 2035 and a proposal to do the same for big diesel rigs by 2040, but hopes to find a viable path there — while not Ignore the current demand for gasoline power.

“What do we have to do to achieve this mid-term transition?” Jaffe said. “We should create ways to provide mobility to those who need it — not fuel.”

blame game

Newsom and state energy officials have again to blame To oil and gas companies, accuse the companies of “blackmailing” Californians. While Californians have long paid more at gas stations than their neighbors — a premium often attributed to the state’s environmental laws, taxes and special blends that are less harmful to the atmosphere — state leaders say, The recent spike shows a worrying gap between fees and price tags.

“The data shows that even as crude prices fall and state fees and taxes remain the same, gas station prices have risen as refinery costs and profits more than tripled, and Californians now pay $2.18 for a gallon of natural gas. ,” David Hochschild, chairman of the California Energy Commission, said in a statement Wednesday. He asked for information on the “sudden disparity between national and California prices” from refineries in the state, which produce the vast majority of natural gas sold in California.

He also pointed to two cases of unscheduled maintenance problems at refineries over the past decade: the September 2019 shutdown of five refineries and a price spike of about 34 cents a gallon, and the 2015 explosion at the Torrance refinery that caused prices up 46 cents.

“Refinery maintenance alone — especially pre-scheduled maintenance — doesn’t explain the sudden $1.54 increase in what refineries charge Californians for every gallon of gas they buy,” Hochschild said.

However, Ed Hills, an energy researcher at the University of Houston, disputed the governor’s claims, saying he did not see hard evidence of price gouging during this surge.

“The real problem is that you lose hundreds of thousands of barrels of refining capacity a day,” Hills said. “To make up for that supply, people have to divert supply from the rest of the country, and that just costs money.”

Newsom on Friday called for a special legislative session in December for lawmakers to consider a new tax on excess profits oil companies make from soaring gas prices, calling the idea that the spike could be caused by repairs “nonsense.” talk”.

Executives at Valero, which operates two of the state’s 11 gasoline refineries, warned in a letter Friday that additional costs such as the new tax “will only further exacerbate pressure on the fuel market and adversely affect refiners,” Ultimately these costs will be passed on to California consumers.”

In response to the Energy Commission, Valero and PBF Western Energy (which also operates two natural gas refineries in California) denied any form of price gouging or market manipulation, instead placing much of the blame on the state’s many regulations and policies , these regulations and policies have led to such strict regulation. market.

While oil companies have exploited the situation in the past, confirming it requires “some serious research,” Hills said. A federal judge in San Diego recently dismissed a lawsuit accusing some of the world’s largest oil companies of colluding to keep supplies low in California, driving up profits.

Jaffe said it was too early to tell whether there was market manipulation, but with the limited number of refineries in California — many owned by the same company — “there are a number of ways that refiners can play with the system.” She called for proper regulation, but said ideally more oil groups would respond to market changes and transition to making greener energy, while maintaining the ability to provide the gasoline people depend on.

“Car companies across America are now changing their manufacturing platforms,” ​​Jaffe said. “Why not [oil companies] invest in new infrastructure while providing their [gasoline] Serve? “

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