Posted at 10:56 p.m. PST Thursday, March 16, 2000

Gasoline prices expected to continue their spikes Task force predicts erratic swings could go on for three years BY GARY RICHARDS Mercury News Staff Writer

SAN FRANCISCO -- California motorists, take a deep breath. Wild monthly increases of 40 to 50 cents per gallon of gas may continue over the next few years.

Members of a task force appointed by Attorney General Bill Lockyer to probe the high cost of gasoline in the state are nearly unanimous: More sharp spikes are inevitable. Eliminating the additive MTBE from California's special blend of reformulated gas will cause more shortages and result in sharp increases for a few months every year for the next three years at least, task force members said.

``There is going to be a supply squeeze when this happens,'' Lockyer said Thursday at Fort Mason, where the task force held the third in a series of workshops. ``Prices will bounce around more, I'm afraid.''

The prediction of erratic price swings comes at a time when Silicon Valley motorists already are paying the highest price for gas in 14 years when inflation is factored in, an average of $1.85 a gallon for self-serve unleaded. Gas could reach $2 a gallon nationally -- and even higher here -- by Memorial Day.

Wild price swings first began occurring in 1996, when the state converted to a new blend of gasoline that burns cleaner. Monthly swings have been as high as 50 cents, and have occurred every year since except 1997.

Many elected leaders had hoped that increased production by OPEC would stabilize prices. That hope may be dashed. Officials now warn erratic prices will most likely follow the jumps motorists are enduring today.

Governor Gray Davis last year ordered the phaseout of MTBE, the controversial gas additive that has contaminated numerous underground wells throughout the state. The six refineries that produce California's unique blend of gas expect production to slip 10 percent while they convert their equipment to a new blend of fuel.

That may not seem like a sharp drop, but the state already has trouble maintaining inventories. At full tilt, nearly 42 million gallons of gas are produced a day -- almost exactly what the state's drivers burn up in a single day during the summer.

Now, with refineries down for maintenance and OPEC cutbacks, about 36.3 million gallons of gas are being produced a day. If any further disruption occurs -- like the refinery fires of last year -- prices will soar again.

The Bay Area now has the highest prices for gas since 1986, when prices are adjusted for inflation. Gas in San Francisco costs $1.90 on average, the highest of any major city in the United States.

No easy answers

``This situation is only going to get worse as we take MTBE out of the system,'' said Severin Borenstein, director of the University of California Energy Institute and a member of the task force. ``Everyone pretty much agrees on that.''

No member of the task force opposes eliminating MTBE. They say the threat to the state's water supply is too real to turn back now. But, as they try to find ways to ease gas prices, they are finding no simple solutions.

Many ideas have been proposed. Assemblyman Kevin Shelley, D-San Francisco, wants to establish a gas reserve in the state, which could release thousands of gallons to ease sudden spikes like the current one. Prices have risen 35 cents since last month.

Democrats on Thursday said they would also consider suspending the sales tax on gasoline over the summer, after fighting off a Republican attempt to eliminate this tax, which adds about 13 to 18 cents to the cost of a gallon of gas.

A half dozen other ideas are being considered by the task force, including one to allow the state to import gas from other states when shortages in California occur.

This idea has support among independent dealers, who want the flexibility to drive their trucks to places like Phoenix to load up with gas if inventories in California run short. Some discount stations in Southern California have closed, unable to buy gas on the market.

Gas station owners are hurting, losing two to 12 cents a gallon, according to the California Energy Commission. Major refineries are the winners, raising their margin -- which includes both profits and costs -- 30 cents a gallon since a year ago.

State supply down

While there are 13 refineries in the state, only six produce California's type of gas. Today there are just 12 days of gasoline supplies in California, down from 18 days worth of supplies two months ago.

But there are no prospects of allowing more refineries in California. Several smaller ones shut down when the MTBE-brand of gas was introduced, unable to convert their equipment and still turn a profit.

That has left only the major refineries -- Chevron, Tosco (76), Equilon (Shell), Arco, Mobil and Exxon -- producing the gas California motorists need.

``You are not going to build another refinery in California,'' said Will Woods, executive director of the Automotive Trade Organizations of California Inc. ``That's just not going to happen for environmental, business and a lot of other reasons.''

Although the U.S. Energy Department has predicted that prices might ease next year, the volatile market in California is expected to remain. With supply barely able to keep up with demand, any unforeseen disruption is expected to send prices skyrocketing again.

Before the state introduced its new blend of gas in 1996, prices in California averaged only a nickel more than the national average. By April 1996, prices in California approached $1.60 a gallon, while the national average was 45 cents cheaper.

In addition, prices in the Bay Area were only a few cents higher than in Southern California. Now the price difference is 20 to 25 cents.

That's a trend that's been repeated every year since.

The task force is expected to release its final report this spring. Don't expect miracles.

``There is no magic wand,'' Lockyer said. ``Nothing can be done overnight.''

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-- Martin Thompson (mthom1927@aol.com), March 17, 2000