October 11, 2012
Governor Brown solves California's gas price problem
Though the record gasoline prices paid by Californians last week received national attention, it was from the beginning strictly a California problem.
|New Jersey Historical Gas Price Charts Provided by GasBuddy.com|
California has separate gasoline requirements from the rest of the nation, and also requires a different, more-expensive fuel for summer sales relative to winter. Because refiners don't want to be stuck holding the summer blend through the winter, inventories of summer blend are intentionally low this time of year. That creates a problem when two of the main refineries producing the California summer blend get knocked out, as we just observed.
But two important developments have changed the picture. First, the Torrance refinery was back in operation by Friday. Second, on Sunday Governor Jerry Brown (D-CA) directed the California Air Resources Board to allow use right now of the winter blend instead of waiting as usual until the first of November, a move that the Board has implemented. This allows existing stocks of the winter fuel to be sold to add to the supply of the summer blend. Moreover, because a greater volume of the winter fuel can be created from a given barrel of oil, Brown's move allows more California gasoline to be produced each week. The Governor's statement claimed that "allowing an early transition to winter-blend gasoline could increase California's fuel supply by up to an estimated 8-10 percent with only negligible air quality impacts."
Several reporters have asked me what economic effects this episode may have. My answer is they should be pretty limited-- I'm expecting the retail price to come down almost as quickly and dramatically as it went up. The spike will remind car buyers that getting saddled with a gas guzzler could be a decision they'll come to regret. But my view is that most Americans were already pretty tuned in to that reality.
The episode may also serve as a reminder that the more layers of regulation we put on commerce, the less resilient is the system when something goes wrong.
Posted by James Hamilton at October 11, 2012 06:10 AMdigg this | reddit
Why is the focus on the amount of regulation? I don't agree that's the takeaway, but first why not focus on the purpose of the regulation? Do you want the smog to come back over LA? I like the purpose of the regulation. If we separate out that part, the idea raised at the end looks wrong: this is a market response to regulation, one that minimizes the cost by lowering the quantity of the summer blend as summer ends. The market is resilient because it has bounced back quickly and that has two components: the industry puts plants back on line and government reacts. That is resilience: it has a hiccup but it bounces back.
The way to solve this, if you mean reduce the risk of hiccups, would be for the government to require the oil companies to keep more summer blend on hand. But that would be uneconomic. The trade is that to achieve a rational air quality - which anyone living in Southern California knows was sorely lacking - we have a risk of hiccups. But the alternative isn't then less regulation - if you want breathable air - but either accept that industry will lower its exposure naturally or regulate them even more.
Look, California could have required more summer blend to be on hand, but they didn't because they thought that would be a burden beyond what the regulations for air quality required. The lesson is that the market doesn't always provide, but that it will adjust so it can. If the expectation is that the market will provide with no hiccups, then really that's just wrong: markets hiccup all the time on their own. We could have avoided this hiccup but at the cost of more regulation that would have burdened the oil companies with extra summer blend gas. That would have built safety into the system at a cost. By choosing to go with the market to achieve the socially and economically desirable result of breathable air, the government exposes the people to market risk. That's the lesson.
Posted by: jonathan at October 11, 2012 07:02 AM
I think it all fits the picture of a California--a state with all God or man could grant it--trying desperately to wipe itself off the map with excessive government intervention.
Posted by: Steven Kopits at October 11, 2012 07:29 AM
I;ll repeat my comment from your Oct. 7 post:
This sort of nonsense occurs every summer in the midwest when something happens to "temporarily curtail production" at one of several refineries... a leak here, needed maintenance there....
The real issue is that the EPA has its 57 varieties of condiments, gasoline, that prevent balancing supplies for summer blends. Of course, one could ask why, in the age of sophisticated engine controls, that one blend of gasoline could not be used all year.
No, that would cause some bureaucrats to have to think up something else to gum up the marketplace engine.
Posted by: Bruce Hall at October 11, 2012 07:31 AM
I agree that more layers of regulation will make a system less resilient.
But that does not necessarily mean that the regulations are not worthwhile.
Posted by: spencer at October 11, 2012 07:39 AM
There were some trader reports that a big short squeeze was in play on top of the production shocks. I know you're skeptical of the role that speculation plays in global oil markets, but isn't it possible that an impact could be felt in a smaller gasoline market (it's certainly much smaller than the market for US T-Bills).
As someone who breathes in Southern California, I worry that the oil companies can price-spike their way out of the regulation. This time it's a temporary fix to address production shocks and emergency maintenance and won't have much of an effect on air quality.
While we economists like to complain about market inefficiencies driven by regulation, the summer fuel-blend wasn't imposed to give one industry a competitive advantage over another. It is effectively a pigouvian quality tax imposed to deal with the massive amounts of smog in the LA Basin and throughout the state.
We'll see what happens with summer blend prices again next year...but I hope we don't find ourselves looking forward to a return in Stage 1 Ozone episodes.
Posted by: Tudor at October 11, 2012 07:46 AM
The governor's action also effects the expectations of refiner's in the future. It cuts the reward of holding summer gas inventory late in the season with consequence that lower planned end-of-summer-season inventories and even greater variability.
The governor did the time consistent thing which is to ask that the winter blend by allowed to be used. Which may be exactly what refiners anticipated -- that the government was not committed to stick with the summer blend. That would be another factor in explaining why end-of-season inventories have been low -- refiner's knew the government's commitment was time inconsistent.
Posted by: John B. Chilton at October 11, 2012 08:05 AM
I grew up in gorgeous smog-free Southern California, and moved away in 1951, as smog was being perfected, particularly in the mountain-rimmed greater Los Angeles region. Smog peaked some years later, after which anti-smog measures gradually took hold, and the air was much improved. One of the anti-smog measures is summer gasoline that evaporates and pollutes more slowly than winter gasoline. I do not know how much this one action contributes to the improvement of air quality--but eliminating anti-pollution measures on economic grounds and returning California to the grim smog conditions of the late 1950s is not something that those of us with long memories would applaud. The fuel and energy industries wage constant war on all health and environmental regulations -- witness their anti-science campaign obfuscating anthropogenic climate change -- and are not objective observers.
Posted by: Warren at October 11, 2012 08:24 AM
I believe Moonbeam also circumvented environmental rules for the bullet train to no where. While San Antonio recently had to reroute a freeway because of a spider, a $20M spider! Got to admire his pragmatism.
Posted by: pete at October 11, 2012 09:35 AM
"The episode may also serve as a reminder that the more layers of regulation we put on commerce, the less resilient is the system when something goes wrong."
It is also worth noting the the absence of regulations resulted in tens of billions of dollars in annual excess health costs and thousands of excess deaths in southern California alone. The health effects are particularly pernicious for children who have smaller airways.
The "layers" of regulations are necessary because oil companies vigorously oppose strict national standards by the EPA, requiring states like California to go it alone.
Posted by: Joseph at October 11, 2012 09:54 AM
Interesting: "The episode may also serve as a reminder that the more layers of regulation we put on commerce, the less resilient is the system when something goes wrong. "
Is this an extension of Greenspan's testimony to congress about how financial markets are self regulating?
Posted by: dilbert dogbert at October 11, 2012 10:35 AM
So loosening regulations helps the economy? No way!!!
Posted by: Barry Soetoro at October 11, 2012 10:59 AM
Please change the title to "Governor Brown solves the problem the Government created at great expense to economy and consumers."
Posted by: Anonymous at October 11, 2012 12:03 PM
...that getting saddled with a gas guzzler could be a decision they'll come to regret. But my view is that most Americans were already pretty tuned in to that reality.
I beg to disagree. The data set on fuel efficiency since 2000 to 2011 indicate that despite a more than tripling of gasoline prices, most Americans are resistant to moving to high efficiency vehicles.
Yes, they will buy moderately more efficient cars and truck chassis based vehicles (light trucks, SUV's and vans), but are distinctly unwilling to switch over to really good MPG vehicles.
At what price the tipping point occurs I don't know, although the experience of Europe would suggest substantially higher prices than Americans have ever had. Perhaps in the $6-7 range might be final straw - when we start acting as rational agents...
Posted by: Anonymous at October 11, 2012 01:52 PM
"The episode may also serve as a reminder that the more layers of regulation we put on commerce, the less resilient is the system when something goes wrong."
Seems like the system was pretty flexible to me. There has to be a name for the umm.. the bookkeepers fallacy, which is that numbers that are easy to put on the books are more important that ones that are hard to put on the books.
There is the costs of regulation, more expensive gas in the summer. And then there is not breathing nasty polluted air. Increased medical costs, shortened life spans, lost work due to illness, economic development that wouldn't have happened if the LA basin was more polluted. What are those numbers, we don't know really, except they're large, very large.
Posted by: Gibbon1 at October 11, 2012 02:05 PM
JDH The episode may also serve as a reminder that the more layers of regulation we put on commerce, the less resilient is the system when something goes wrong.
I interpret your comment as an endorsement of greater reliance upon taxes at the pump as an alternative way of controlling the negative exteranalities of tailpipe pollution. I agree, but are voters mature enough to accept higher taxes, or are Californians doomed to second, third or fourth best alternatives?
Posted by: 2slugbaits at October 11, 2012 02:28 PM
"My answer is they should be pretty limited-- I'm expecting the retail price to come down almost as quickly and dramatically as it went up."
I'll take the other side of that one. The spike up took 3 days according to your chart. I bet we don't see prices drop back to pre-spike levels for a lot longer than that.
Also, with regard to your comment about regulation - " the more layers of regulation we put on commerce, the less resilient is the system when something goes wrong." -- We tried an unregulated electricity system and we got Enron'ed. We tried an unregulated mortgage lending system and we got MERS and the Great Financial Crisis. And many commenters have pointed out that unregulated gasoline led to horrific smog. (Not to mention the posts at CalculatedRisk about the evils of leaded gasoline and so on.) It's certainly possible to have bad regulations, but it's also possible to suffer from too little regulation.
What we need is smart regulation. In particular the justification for summer vs. winter fuel could be revisited, and so could the method for handling the transitions between the two.
Unfortunately, in the absence of smart regulation the corporations have proven they have no conscience and no soul, thus causing the populace to demand excessive regulation for self-defense.
Posted by: Wisdom Seeker at October 11, 2012 08:50 PM
The map of the different regulatory regimes in the various states suggests the need for federal regulation. Different climactic regions of the continent may require several different types of gasoline, but surely not the patchwork of gas mixtures that the map reveals.
Posted by: prsullivan at October 12, 2012 05:55 AM
If you look at the commetns of the big-government folks above, they all take the predictable stance that if you don't like the current set of regulations then you don't want any regulation at all! They rinse and repeat that tired arguement over and over and over - wall street, pollution, drilling, health care, food inspection, etc, etc.
I am sure they are all intelligent enough to realize that it's possible to accomplish the same policy goals with a more effective/efficient set of regulations. They seem to think that if big-government policy makers crafted the policy, then by definition, it's optimal.
Posted by: tj at October 12, 2012 06:36 AM
It is not that liberals believe current policies are optimal.
Rather, it is that the current policies are superior to anything we could get conservatives to go along with.
Posted by: spencer at October 12, 2012 08:05 AM
prsullivan: "The map of the different regulatory regimes in the various states suggests the need for federal regulation. Different climactic regions of the continent may require several different types of gasoline, but surely not the patchwork of gas mixtures that the map reveals."
Republicans have worked hard to specifically prevent the EPA from making national regulations. And as I have pointed out before, the oil companies are delighted to have a patchwork because it allows refineries to maintain their regional cartels that limit competition and provide excess profits. Those two facts might be related.
Posted by: Anonymous at October 12, 2012 09:15 AM
“Yes, they will buy moderately more efficient cars and truck chassis based vehicles (light trucks, SUV's and vans), but are distinctly unwilling to switch over to really good MPG vehicles”.
Perhaps the reason that people do not buy small efficient vehicles is that they are too fat. As soon as we have national healthcare and weigh-ins then perhaps proper vehicles will be purchased.
Posted by: AS at October 12, 2012 09:47 AM
Re: your 'strictly' a CA problem comment: Reno spiked too. Given that all of the product pipelines crossing the CA border are flowing out of the state (kinder morgan now owns all of them) and that the only significant refineries in PADD V are in CA and WA, it is quite interesting that the price did not spike elsewhere. I am particularly interested in the lack of a spike is Las Vegas, where the CalNev pipelines provide all of the refined products for Vegas, Clark AFB, and McCarran airport (except for the 60kbd UNEV pipeline from Salt Lake). I wonder if Vegas lucked out on the timing of the Calnev gasoline run, had full storage and had just started the distallate run when Torrance went down? Or maybe there were firm deliveries already scheduled in the CalNev pipeline which caused CA to spike harder instead of drawing down Vegas stocks too?
Posted by: benamery21 at October 12, 2012 04:38 PM
Perhaps the reason that people do not buy small efficient vehicles is that they are too fat.
Now,that caused me to laugh (saying I got a belly chuckle out it, would be a bit too much...)
More seriously, I think a major part of the resistance is that, as measured by sales, Americans love fat cars.
Vans virtually obliterated the station wagon, SUV's nearly did the same to full sized cars.
Bigger is better has long been a belief in the US, particularly when it comes to the vehicles we use. The main reasons cited are: Bigger is safer, more carrying capacity is desired/needed. and, not unimportantly, cars reflect status, and small vehicles, for the most part - saving sports cars, and a few outliers, like the Prius - are seen as having lower status.
Whether there is any merit to any of those reasons is immaterial. What does matter is people's perceptions, and so, fat is good. Even when it comes at a cost.
(Hmmmm, somewhat like how people feel about food..)
Posted by: SecondLook at October 12, 2012 05:57 PM
Modern cars have closed fuel systems (since at least 1971) where any vapors from the fuel tank go to a canister and are concentrated there and at some times air is admitted to burn the results. Plus you have dispenser based fuel vapor recovery, so the question is does the blend solve a problem that is now very small as pre 1971 cars are a very small part of the mix being now antiques. This is why if you loose the gas cap or it is not tightened the check engine light comes on. Is the summer winter issue then a relic of the past?
Posted by: Lyle at October 12, 2012 10:11 PM
I'm going to add a little to my earlier remarks.
Fuel efficiency isn't in the self-interest of two major segments of the American economy. Large vehicles - particularly those based on truck chassis - are considerably more profitable than smaller ones. Therefore, it isn't something that auto makers really want to promote (their pushing high mileage cars is more directed towards their competition, than any real desire that those will become the bulk of their sales).
The oil industry, obviously, from producers to refiners to vendors, obviously don't want to see demand for their product to decline - although since oil is the quintessentially fungible commodity, reduced demand domestically is likely to be more than offset by increased international demand.
Finally, indirectly, government stands to lose tax revenues - as is already happening - as gasoline consumption declines.
Not saying that there is any formal push against fuel efficiency, but that there are forces that really don't want to encourage it, too much.
One last note: It's interesting that Republicans are bucking against the new CAFE standards, lead by Darrel Issa, Chair of the Committee on Oversight and Government Reform. Expect that if the fall election goes to the Republicans, we'll see the new requirements to be gutted.
If that happens, while auto makers will continue to work on improving average fleet mileage, the pace will be considerably slower, with more consequence as the ability to meet fuel demand at an affordable price becomes harder and harder.
Posted by: SecondLook at October 13, 2012 08:03 PM
Note:I'm an electrical engineer without direct product pipeline or oil product price knowledge.
A hypothesis of why Phoenix and Vegas (which do not have refineries and whose refined products originate largely in Los Angeles) retail markets did not spike (much):
I had originally had little trouble explaining to myself why Phoenix had not spiked, as a substantial fraction of refined product there comes from the East Line (from El Paso), and this was re-inforced when I discovered that the East Line has been substantially upgraded (in 2006-2007) since the 2003 Phoenix gas price spike when the failure of the East Line between Phoenix and Tucson demonstrated that Phoenix was not able to obtain all of its refined products thru the West Line (from L.A.). However, even with the dramatic upgrade of the East Line not all of AZ's refined products can be supplied from Texas.
I was much more interested in Vegas, since Reno (pipeline from the SF Bay area) HAD spiked, and I knew that until recently all of Vegas' refined products (including those for Clark and McCarran) came from the Cal-Nev pipeline from SoCal. Further, although I knew that the UNEV pipeline from Salt Lake to Vegas had been recently completed and put in operation (2012), I also knew that it was too small (62kbd) to supply Vegas by itself, and that existing SLC refinery capacity had been too small to supply Vegas in addition to present production in any event. This left me puzzled as to why a larger spike was not seen in Vegas. I wonder about local tank farm stock, pipeline run timing, and long term supply contracts.
However, given that distillate supply in CA was far less constrained than motor gasoline supply, perhaps the lack of a price spike in Vegas can be partially explained by the hypothesis that higher fractions of distillate were supplied by the CalNev pipeline and motor gasoline by the UNEV pipeline. This could have potentially balanced physical supply in the short term, and if stocks in Vegas and SLC were high enough, would not necessarily have led to a retail price spike. The change in price differential of gasoline and distillate in SoCal could have provided sufficient motivation for this, potentially without increasing retail prices in SLC and Vegas. If this continued long enough, though, one would expect gasoline prices in Vegas and SLC to rise and distillate prices in SLC to decline as motor gasoline stocks began to decline.
Posted by: benamery21 at October 14, 2012 09:03 PM
I love the way Californians say the regulations are necessary to protect themselves from the greedy oil companies. It's like a junkie blaming his dealer for his drug abuse.
It is completely within the ability of every californian to do something about air quality. They could drive much less, they could car pool, they could use their much vaunted public transport system, they could walk, they could bike, they could telecommute. They could even leave the state and move to a city that does not suffer a massive inversion layer like LA. That would require self control, that would require a degree of both individual and societal discipline that no one wants to work toward. No, it is much easier to demand that the other guy be regulated so that your self destructive behavior is ever so slightly less destructive.
Posted by: Jardinero1 at October 15, 2012 03:05 PM
Ah, yes, Jardinero1. Those babies and toddlers, who are the primary victims of polluted air, should quit their jobs and move, stop driving and start riding bicycles. Yes, babies and toddlers, part of the 47% who pay no taxes, consider themselves victims, have no self-control, and refuse to take responsibility for their own lives.
Where did conservatives get the idea that Charles Dickens was writing operating manuals?
Posted by: Joseph at October 15, 2012 05:33 PM
Babies and toddlers don't drive cars, pollute the air or demand onerous regulation of gasoline refineries. Their parents, like you, are the ones driving the cars which poison the air but they blame the oil companies. My comment is addressed to those parents who would rather drive their cars but blame the oil industry instead of modifying their own transportation patterns.
Posted by: Jardinero1 at October 16, 2012 08:07 PM
Hmm. The gasoline price chart auto-updates, so soon this price data will be obscured: California gasoline prices rose over 5 days from under $4.17 to $4.66/gallon, from October 1 to 5. They remained above $4.60 until this article came out on the 12th. After the 12th they declined over 6 days to $4.50 today.
The rise was 50 cents in 5 days. The decline, so far, has been about 10 cents in 6 days.
The data so far do not agree with the professor's statement that he is "expecting the retail price to come down almost as quickly and dramatically as it went up".
It will be interesting to see if prices do suddenly plunge.
Posted by: Wisdom Seeker at October 18, 2012 06:09 AM
Command and control California.
Oh the pride of enjoying the lowest excise taxes on gasoline and diesel fuel among the rich-OECD countries.
Posted by: westslope at October 24, 2012 12:40 PM