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California Voters Only Have Themselves to Blame for Soaring Pump Prices

If Californians want to know who's to blame for sky-highgas prices, they need to look in the mirror.

Faced with a price spike over the past week that saw stations charging well over $5 a gallon, California drivers have been asking who's behind the recent surge. Sen. Diane Feinstein, D-Calif., late Friday demanded that the Federal Trade Commission investigate the cause of the price spike.

“Paying hundreds of dollars to fill your tank every time you go to the pump is untenable,” she said in a statement that pointed to “malicious and manipulative trading activity” as a likely source of the surge. California's Gov. Jerry Brown on Sunday took steps to try to ease the shortage that has driven up pump prices.

Any investigation into the cause of the temporary price surge, say oil industry analysts, wouldn’t take long.

For years, California's gasoline supply chain has been tighter than just about every state except Hawaii, leaving motorists vulnerable to even minor crimps in the supply chain. That, along with the second highest gasoline tax in the country, is why it costs more to fill up in California than it does elsewhere in the U.S.

And the reasons are almost entirely the result of policies and regulations enacted at the behest of California's voters.

Unlike past nation-wide gas price spikes, Golden State drivers can't blame their pain at the pump on crude oil prices — which account for about two-thirds of the cost of a gallon of gasoline. After peaking in May at $105 a barrel, the domestic benchmark price has fallen to $92 as of last week.

Oil prices have fallen because there’s plenty of crude to go around, thanks to a slowing global economy and new drilling technologies that have dramatically increased U.S. production. After two decades of declines, domestic oil output began rising in 2009 and is expected to continue to grow through 2014, according to the Department of Energy. Crude oil stocks are above the high end of the five-year average for this time of year.

The glut of domestic supply has helped drive down the price of oil based on the domestic benchmark price, known as West Texas Intermediate, compared to oil priced with the global Brent index. Until 2010, the two benchmarks tracked within a few dollars of each other. Today, U.S. refiners enjoy a $20 discount when they pay the domestic benchmark price.

But that discount doesn't get passed along to California drivers, who pay more for gasoline than drivers elsewhere in the country because gasoline supplies are much tighter in the Golden State, which, if it was a country, would have the world's eighth largest economy.

One reason is that state regulators insist refiners produce a specific blend of gas to meet tough state air quality standards. That means refiners and wholesalers can’t make up temporary shortages with gas that can be sold elsewhere in the U.S.

And while refiners in other states have gradually expanded output over the years to keep up with demand, no California politician would dream of campaigning on a platform of building new oil refineries. The result is that gasoline supplies in California have gradually tightened as refiners have been unable to win approval to expand production, according Tom Kloza, publisher of the Oil Price Information Service.

“Refiners and the California regulatory community have gotten along about as well as Nicki Minaj and Mariah Carey are getting along at the moment,” he said.

The price spike also came as California refiners entered the final weeks before a state-regulated switchover to a different blend of fuel sold only in winter months, when lower temperatures create different conditions that alter the way combustion of gasoline contributes to air pollution.

Because few refiners want to be stuck with the cost of storing summer-blended fuel until spring, inventories this time of year are typically at seasonal lows. That creates even less of a cushion against supply shocks.

“We expect to see a reduction in supply, and we expect to see refiners do some of their maintenance because there is usually less demand this time of year,” said Jeffrey Spring, a spokesman for AAA of Southern California. “Sometimes it works, and sometimes it doesn't."

This year, things didn't work out well for California drivers. Following a series of supply crimps this summer, the supply chain snapped last week.

The supply pipeline started to dry up after an Aug. 6 a fire shut down Chevron's 245,000 barrel-per-day plant in Richmond, Calif. Then Exxon Mobil's 150,000 barrel-per-day Los Angeles-area refinery in Torrance was hit with a power failure last week. An outage at a pipeline in the Central Valley only made matters worse.

Those outages helped send wholesale prices soaring to levels that some dealers were unwilling to pay, producing spot outages that forced some stations to close.

On Monday, the statewide average price for a gallon of regular rose to an all-time high for the third straight week, hitting $4.668, according to AAA. That topped the previous record high of $4.6096 per gallon set on June 19, 2008.

As production from those refiners comes back on line, wholesale prices have fallen sharply. That means the temporary price spike should gradually unwind in the weeks ahead.

Prices should also start falling fall following an order from Gov. Brown on Sunday that state smog regulators allow winter-blend gasoline to be sold earlier than the usual Nov. 1 start date. The order means refiners can begin to tap stockpiles of winter fuel to ease the latest shortages.

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