Sunday, October 15, 2000 | Print this story

State Barreling Ahead Toward a Fuel Shortage

Energy: Delicate balance of supply and demand may shift to a 10% shortfall when cleaner-burning gasoline is mandated in 2003.

By CHRIS KRAUL, Times Staff Writer

California is entering a gasoline crisis that in the next two years could sharply drive up prices, as output from the state's refineries is scaled back and economic growth boosts demand. To avert fuel shortages will require new refining capacity for the special environmental blend of gasoline mandated by state law, but the required investments are not currently being planned--and the likelihood is slim that they will be.

Almost overnight, California could go from its current precarious balance between supply and demand to at least a 10% shortfall when new state laws will require even more environmentally friendly formulations in 2003. Prices could reach as high as $3 a gallon under one worst-case scenario.

Relying on oil imports--if they are available--to make up the difference in future shortages would mean higher and more volatile gasoline prices, state officials and outside analysts agree. That would put the state in about the same position it found itself in during this summer's electricity crunch. "There's a bomb coming," said Leslie Watson, a Long Beach-based energy consultant. Although gasoline prices are subject mainly to fluctuations in crude oil prices, "we could be paying a lot more for gasoline." Just since 1996, half the state's 26 refineries have shut down in response to tighter environmental laws. And as even tougher regulations take effect, refiners are electing to defer investments to meet future demand. The sum of the California Legislature's response to the problem in its recently adjourned session was two laws that authorized studies about the feasibility of establishing a gasoline pipeline from Texas and a state gasoline reserve.

Meanwhile, crude prices are not helping the outlook. Oil is hovering near $35 a barrel--or three times the levels seen at the end of 1998--amid predictions that the global outlook for the crude market is deteriorating.

Still No Sense of Urgency Beyond the two feasibility studies, and red flags raised by the state attorney general's office and the California Energy Commission, there seems to be little sense of urgency. That's understandable, given the difficulty in predicting energy markets even a few months in the future, let alone more than two years, when market forces are expected to come to a head. At the same time, there are no obvious near-term solutions, given the almost certain impossibility of building new refineries in the state and the fact that the few outside sources of California's cleaner-burning blend are themselves projecting new demands--and thus higher prices--for their products. Opinions vary not about whether gasoline prices will rise in coming years but by how much. Oil economist Philip K. Verleger of Newport Beach, a pessimistic but prescient market observer, worries that Californians will be paying $3 for a gallon of gasoline--at least on occasion--by 2003. "It's very daunting," he said. What worries Verleger is that, just about the time that gasoline retailers here will seek more imports from Texas--one of the few places that make the cleaner blend approved by the California Air Resources Board--that state will begin revamping its refineries to meet tougher pollution guidelines of its own. That, plus rising demand for Texas gasoline in other states, could ignite price competition.

Less apocalyptic but worried nonetheless is analyst Watson of energy consultants Purvin & Gertz, who said shrinking in-state gasoline supplies combined with steadily growing consumption by California motorists will make the extreme price spikes seen here in the last two years a more common occurrence. The oncoming gasoline crunch is a consequence of tighter environmental laws that not only have reduced air pollution but also have forced a dozen of the state's refiners out of business in the last five years. It also stems from the not-in-my-backyard attitude that makes building ugly, polluting refineries especially difficult in California. Prices will rise because gasoline supplies in the state will fall, mainly because of the ban on methyl tertiary butyl ether (MTBE), an additive that helps gasoline burn more cleanly but contaminates ground water. When it takes effect in January 2003, the ban will in one stroke cut 11% from state supplies because that's how much gasoline the additive accounts for by volume.

In addition, new state clean-air requirements that take effect at the same time will cause slight reductions in refinery output unless owners spend hundreds of millions of dollars for new equipment.

170,000-Barrel Daily Shortfall Possible Those factors, combined with an expected 6% growth in consumption by 2003, could lead to a 17% market "imbalance" compared to current conditions--or a shortfall of about 170,000 barrels of the expected 1 million a day California will need, state officials say. Only about one-third of those barrels, each containing 42 gallons, can be replaced by increased in-state refinery output, according to current estimates. The resulting 10% shortfall of in-state gasoline production and possible price spikes were foreseen by official studies, which predicted that the clean-air provisions of the air resources board's so-called Phase 3 rules would add 2 cents to 6 cents per gallon to the cost of producing gasoline. But analysts now say higher levels of imports will cause more shock at the pump than originally thought, judging from the severe wholesale price spikes of as much as 50 cents per gallon above U.S. averages seen here in the last couple of years, whenever refineries were shut down by accidents or maintenance and imports were turned to on a temporary basis. State gasoline production, currently averaging about 950,000 barrels a day, is just enough to meet demand. But supplies will fall out of balance with demand by January 2003, when the only permissible gasoline for the state must meet CARB's Phase 3 specifications for less sulfur, which contributes to smog, and benzene, a carcinogen. The measures will result in a daily reduction of 2%, or 19 tons, in emissions on California roadways, continuing the state's decades-long efforts to clean the air.

The resulting 10% shortfall may be comparable to the electricity generation shortage the state is now suffering. California's dependence on imports for 20% of its electric power helped send wholesale prices skyrocketing last summer. Only rate caps imposed on utilities by the state are saving consumers and businesses from sticker shock at having to pay twice or even three times what they paid a year ago. As usual, California is at the forefront of environmental measures, and other states are expected to follow its lead. The new rules mean there will be less pollution, and many residents are relieved by the ban on MTBE, an insidious contaminant found in drinking water whose effects still are being studied. But environmentalism carries a cost to refiners that some are unwilling or unable to shoulder. In 1996, half the state's 26 refineries closed rather than spend the average $400 million necessary to conform to the so-called CARB 2 clean-fuel requirements, the precursor to CARB 3 rules. The environmental benefits of CARB 3 gasoline are abundant, said Gordon Schremp, an analyst for the Energy Commission. "But consumers ought to be prepared for the cost of all this." So far this year, California motorists have resigned themselves to 40% price hikes at the pump. Indeed, residents have been buying as much gasoline as ever, with consumption up about 2% this year, the Energy Commission said, roughly in line with population growth. "We drive. It's a basic fact of life in California," said Barry Pulliam, a petroleum economist at Econ One Research Inc. in Los Angeles. "Some people could compare a gallon of gasoline with a bottle of Evian water and say it's cheaper."

The enormous environmental and financial obstacles that new refinery projects face make it highly unlikely that California would regain refining self-sufficiency any time soon. The state's 13 refineries already are operating at 100% or more of their designed capacities. Currently, only Ultramar Diamond Shamrock is known to be planning expansions, with improvements at its Wilmington and Concord refineries expected to fill 60,000 barrels of the projected 170,000-barrel daily shortfall. The best chance for adding significant gasoline production in the state is through reactivating one of several refineries that have been mothballed since 1996. The biggest is the Powerine facility in Santa Fe Springs, whose owner, CENCO Refining Co., wants to restart operations. But CENCO faces significant environmental hurdles and stiff local opposition. All of which means the state probably will have to turn to outside sources for 10% of its gasoline. The sources are limited to three refineries capable of brewing California's CARB 3 blend: in Corpus Christi, Texas; the U.S. Virgin Islands; and Finland. Shipments of gasoline from those refineries via ocean tankers will incur transportation costs that will tack on an average of 8 cents to 12 cents to the price of a gallon of gas. But the real price pressures will come from market imbalances that will pit more and more importing states against each other for increasingly scarce product.

California Atty. Gen. Bill Lockyer, who is investigating oil company practices and their effects on the state's stressed-out gasoline market, was so alarmed that he sponsored Assembly Bill 2098 to fund a feasibility study of a pipeline link from the Texas Gulf Coast. Gov. Gray Davis signed the bill last week, as well as AB 2076, which requires the Energy Commission to examine the feasibility of operating a state strategic fuel reserve. A critical segment of the proposed pipeline, owned by Dallas-based Longhorn Partners, is complete but inoperative because of litigation and environmental challenges. If and when gasoline begins pumping, the pipeline could facilitate delivery of enough fuel to Arizona to free up at least 15,000 barrels a day that California refineries now send to the Phoenix-Tucson area.

Economist Verleger, who correctly foresaw crude oil prices rising to nearly $40 a barrel this year, warned that, even with such a pipeline operational, there may not be enough gasoline to ship here from Texas in coming years because many refineries there are shutting down to retool to meet stricter clean-fuel requirements. "This will take much of Texas out as a source of gasoline for California," he said, "so it's going to be real tight."

http://www.latimes.com/news/front/20001015/t000098321.html

-- Martin Thompson (mthom1927@aol.com), October 15, 2000

Answers

Alas, we in California will have to pay the price for the dunderhead politicians here, in Sacramento, pre-orrdaining our fate with their ridiculous edicts, regulations, laws, and manifestos.

-- JackW (jpayne@webtv.net), October 15, 2000.