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ENERGY–Gas Prices Expected to Climb Again Oil Prices, MTBE, Seasonal Demands Add to High Costs

Drivers in San Diego and San Francisco, accustomed to paying higher prices at the pump than most of the nation, can expect to pay even more for gasoline in the upcoming months.

The uncertainty comes as the state attorney general looks into whether gas prices have been kept artificially high in the state.

Attorney General Bill Lockyer has been filing injunctions against oil companies and conducting hearings , including a Feb. 9 meeting in San Diego , as he considers taking further action.

The Feb. 9 hearing was the second in a series of forums held throughout California. Information from these hearings will be incorporated into a report to be released in April.

Gordon Schremp, energy analyst with the California Energy Commission, noted prices for crude oil have climbed above the $30 mark for the first time in nine years , rising to $30.25 a barrel as of Feb. 14.

Although the cost of oil could go higher, Schremp predicted the Organization of Petroleum Exporting Countries (OPEC) will have second thoughts and relax the quotas slightly. That should take some pressure off the world price of crude oil, he said.

Schremp predicts that non-OPEC countries could ramp up production in the face of OPEC cutbacks. Or OPEC member nations could cheat on their quotas. That activity will help to create a cap on crude oil prices, Schremp said.

Summer Price Hikes Expected

However, lower prices for crude oil will not necessarily translate into lower prices at the pump in California. That’s because California will enter its summer season, when people traditionally hit the road. That creates more demand for gasoline, keeping prices high, he said.

Another factor that leads to higher gas prices in the long term is the phase-out of the gasoline additive MTBE, due to environmental concerns. MTBE will be gone from California gas by Dec. 31, 2002, Schremp said.

Federal law requires the presence of oxygenates, or oxygen-containing chemicals, wherever gas is sold in areas with poor air quality. With MTBE phased out, refiners will have to switch to an alphabet soup of substitutes, including ETBE, TAME and TBA. But these chemicals have their own environmental problems, Schremp said.

Non-attainment Areas

That leaves environmentally benign ethanol as the only viable alternative, he said.

But as the federal Environmental Protection Agency prepares to reclassify more of California as “non-attainment areas” in terms of air quality, that means that up to 80 percent of the gas sold in California will require the addition of ethanol, Schremp said.

That could raise the cost of gasoline by about 6 & #733; cents, Schremp said.

An alternative will be to lobby the federal government to lift the requirement to add oxygenates. If that happens, ethanol could still be used , but not as widely, and therefore would not affect prices as much, Schremp said.

Meanwhile, Lockyer is acting to eliminate what he considers unfair pricing standards for California gasoline. On Feb. 7, he announced he is joining with the states of Oregon and Washington in filing an injunction to prevent the merger of Arco and BP Amoco.

In his injunction, filed in U.S. District Court in San Francisco, Lockyer stated the proposed merger would reduce competition and increase the cost of gasoline even more.

A preliminary version of the state report due out in April cited the lack of competition as one of the key factors leading to higher gas prices in the state.

“In California, just six companies account for more than 90 percent of California’s refining capacity, and these same six companies control more than 90 percent of the gasoline sold in California,” Lockyer said.

Few Independent Retailers

The situation is different elsewhere. In Texas, for example, the figures are 58 percent and 34 percent.

California has few independent gasoline retailers left. On the wholesale end, Tosco acquired Unocal, while Shell and Texaco merged their refining and marketing assets, Lockyer said.

But that’s not the only reason for high prices. The West Coast is relatively isolated from the major refineries east of the Rocky Mountains, which supply the rest of the country. Significantly, gas prices are much higher west of the Rockies, the report states.

Another factor in California’s high prices for gasoline is the higher taxes , about 5.3 cents a gallon extra.

Yet another reason for high gas prices is the state requirement that gasoline sold here must meet the cleaner-burning requirements of the California Air Resources Board.

CARB gasoline is not produced to any great degree outside of California, and there is little incentive for major refiners to import it. That means higher prices at the pump.

Taxes, Oil Prices And CARB

Michael Moore, a commissioner of the California Energy Commission, said there are several factors leading to higher gas prices, which are beyond the control of oil refineries.

These include state taxes, higher crude oil prices, and the cost of complying with CARB requirements. Only a small amount of the increase is unaccounted for.

Doug Henderson, executive director of the Western States Petroleum Association, agreed. He noted that according to the attorney general’s own report, gas prices were no more than 6.2 cents above the national average in the years 1996-98 , the first three years the state required refineries to produce more expensive CARB gasoline.

What happened in 1999 was a fluke, caused by a number of upsets and outages at refineries. The public was overreacting, he said.

“Too often, solutions are advocated based on exceptional events , rather than normal conditions , to the detriment of consumers and business alike,” Henderson said.

California’s gasoline market is very competitive, Henderson asserted. In addition to the traditional gasoline retail outlets, California consumers now can purchase gas at several discount stores, such as Costco and Wal-Mart, which are not affiliated with any of the traditional fuel suppliers.

‘$2 Billion Overcharge’

However, Dennis DeCota, executive director of the California Service Station and Automobile Repairs Association, disagrees. DeCota noted that there are only seven major oil refiners in the state. If two proposed mergers go through, that number will drop to five.

“Bill Lockyer is rightfully trying to protect California’s consumers from what he calculates is a $2 billion overcharge,” he said.

Matthew Kagan agreed. As the Southern California spokesman for U.S. Sen. Barbara Boxer, Kagan attended the Feb. 9 meeting.

Boxer has been particularly concerned about high gas prices, and last year asked the Federal Trade Commission to look into possible anti-competitive maneuvers by the oil industry, Kagan said.

Boxer is also a supporter of alternative fuel sources. She has aggressively pursued funding for electric vehicles, Kagan said.

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