Pain at the pump

www.sacbee.com Sacramento Bee/Bryan Patrick

The specter of war and other factors send gas prices soaring

By Dale Kasler and Cathleen Ferraro -- Bee Staff Writers Published 2:15 a.m. PST Thursday, February 20, 2003 Pamela Davis was filling her Mercedes with premium gasoline at a Shell station in Gold River on Wednesday when she glanced at the price -- $2.11 a gallon -- and stopped pumping.

"I looked at the sign and was taken aback," she said. "I stopped at halfway."

Gas prices are approaching extraordinary levels in Sacramento, fueled by the peculiarities of California's gasoline market and either pre-war profiteering or pre-war jitters, depending on whose assessment you buy.

The average price of regular in Sacramento hit $1.90 a gallon Wednesday, according to AAA of Northern California, a 19-cent jump in a month's time. And a spot check around town found prices as high as $1.99 for regular -- and well over $2 for the higher grades of fuel.

Californians are feeling more pain at the pump than are other Americans, who are paying $1.66 for a gallon of regular, up 19 cents in the last month.

Analysts said the buildup to a possible invasion of Iraq was the main culprit, but lingering effects of Venezuela's oil strike and conversion by California refiners to ethanol-additive fuels also have a role.

Another issue: Inventories of U.S. crude are at their lowest levels since 1975, the U.S. Department of Energy reported last week.

As a result, analysts believe prices will continue rising unless war is averted.

"It'll probably go higher before it'll go lower," said Chris Mennis, an independent oil and gas trader based in Santa Cruz.

Mennis and others said the largest factor in the run-up of pump prices is the rising worldwide price of crude. It topped $37 a barrel Wednesday, the highest in 29 months and near levels reached in fall 1990, on the eve of the Persian Gulf War.

Every $1 increase in oil barrel prices translates into 2.5 cents more per gallon at the pump. The price of oil has risen about $12 a barrel in the past few months, meaning 30 cents a gallon retail. A consumer advocate doesn't buy the analysts' explanations, saying oil companies are using the potential of war to generate a windfall for themselves.

The current price "is not based on the actual supply available today," said Jamie Court, executive director of the Foundation for Taxpayer and Consumer Rights in Santa Monica. "This is basically wartime profiteering by oil companies."

But oil industry sources and independent analysts said the jump in prices appears to be legitimate. The likelihood of war -- and the prospect of tightened supplies, especially if the conflict spreads to other Middle East nations -- has prompted traders to snap up supplies, and higher prices are the result.

War "is being priced into the current price of oil," said Severin Borenstein, director of the University of California Energy Institute.

"Expectations have always played a role in where prices are," added an industry source who asked not to be named.

California prices have risen even more, in part because of its strict clean-air regulations. The state is an island unto itself when it comes to gasoline because the gasoline it consumes must conform to pollution controls not found elsewhere.

Those requirements lead to higher prices than in other states and a more delicate supply-demand balance, making California prices more volatile.

This year things are a little worse. The rise in crude oil prices comes as several California refineries have temporarily shut down, either for regular late-winter maintenance or to convert their systems from the additive MTBE to ethanol, said analyst Gordon Schremp of the California Energy Commission.

Gasoline production at California's refineries is about 6 percent below a year ago, according to commission statistics.

Although the conversion to ethanol hasn't produced the huge price spikes some analysts predicted, it is keeping upward pressure on prices. So will the beginning of spring, when demand grows and prices normally go up, Schremp said.

The average price in California Wednesday was $1.89 for regular, up 21 cents from last month. California's prices are 23 cents higher than the U.S. average, according to AAA.

The highest prices in California were in San Francisco, where they averaged $2.04 a gallon. The average price in Los Angeles, meanwhile, was $1.86.

California produces nearly half of its own oil -- there's more in the Bakersfield area alone than in all of Oklahoma -- but the state still is subject to the world price.

"It doesn't matter that it's California oil," Borenstein said. "There's a world market."

Borenstein and others said a quick and relatively painless military victory over Iraq could deflate prices, just as it did after the 1991 war. Also working to keep prices from shooting out of sight: Saudi Arabia and other oil producers have promised to increase production to compensate for any wartime shortages.

About the Writer

The Bee's Dale Kasler can be reached at (916) 321-1066 or dkasler@sacbee.com.