California Case Study

(This report appears as Appendix B in Assessment of Summer 1997 Motor Gasoline Price Increase (PDF))

Why Do Motor Gasoline Prices Vary Regionally?
California Case Study

In recent years, retail gasoline prices in California have tended to be higher than average U.S. retail prices. What might be the cause of this difference? Four factors that affect price can be explored to provide some insights into the answer: state and local taxes, costs of feedstocks used to produce gasoline, costs of operations excluding feedstock costs, and profitability.

State and local taxes have been higher in California than in many other states. For example, in 1996 California state and local taxes (including sales tax) ran about 5-6 cents per gallon higher than the U.S. average state and local tax. However, after taxes are removed, California gasoline prices are still higher than in other parts of the country. Annual average California prices, excluding taxes, ran about 1.3 cents per gallon higher than U.S. average prices (all formulations) prior to the Gulf War (1983-1990). From 1992 through 1995, the period between the Gulf War and when the CaRFG program began, California prices averaged 3.9 cents higher than the U.S. average. Since the CaRFG program began in 1996, they have averaged 5.6 cents higher than average U.S. prices (See Figure B.1). In this period, California prices have been more volatile - moving up and down more than average U.S. prices.

A factor often cited in discussions of California gasoline prices is higher operating costs, excluding feedstock (e.g., crude oil) costs. Companies operating in the West experience higher refining and marketing costs. Figure B.2 shows refining and operating costs of major oil companies having 70 percent or more of their refining capacity on the West Coast. These companies represent 52 percent of PADD 5 capacity, and 58 percent of California's capacity. Only 7 percent of the "Other Majors" capacity shown in the figure is located in PADD 5¹. This figure shows that from 1990 through 1995, it cost companies $1.50 to $2.00 per barrel (3.5-5.8 cents per gallon) more to operate² in the West than elsewhere. In 1996, it cost them $3.20 per barrel (7.6 cents per gallon) more.

Costs can be higher in the West for a number of reasons. For example, CaRFG is more expensive to produce than other gasolines. The California Energy Commission has reported that CaRFG costs between 5 and 8 cents more per gallon to produce than Federal RFG. The refineries in the West are the most complex in the country (See Chapter 4 from Assessment of Summer 1997 Motor Gasoline Price Increase), which by itself, would indicate higher operating costs, since complexity increases both investment and operating cost.

Crude oil costs counter the operating cost differences to some extent. The refineries in the West were designed to process heavier crude oils, which are less expensive on a per barrel basis than lighter crude oils. For example, Line 63³ crude oil spot prices averaged over 2 cents per gallon lower than refiners' average imported cost of crude oil in 1996, and California refinery crude inputs average even lower gravity (25-26 degrees API) than Line 63, which runs 28-30 degrees API.

Another important feedstock, MTBE, costs more in the West since much of this oxygenate must be shipped from other locations. Los Angeles spot MTBE prices averaged almost 8 cents higher than those on the Gulf Coast during 1997. This difference could add about 1 cent per gallon to the price of reformulated gasoline on the West Coast versus that on the Gulf Coast.

Based on feedstock costs reported to EIA through the Financial Reporting System, and on crude oil and MTBE price comparisons, the net effect of higher increased operating costs with lower feedstock costs is higher costs to produce gasoline in California.

The final factor considered is that of profits. Figure B.3 shows that the companies operating in California have not been able to earn higher profitability than companies operating outside of the area. Profitability is about the same for both groups of companies shown. Apparently, despite the higher market concentration on the West Coast, there is still adequate competition, and refiner/marketers cannot extract higher profits from consumers (See Side Bar (includes Table B.1) - Market Concentration in California). The data indicate that in the West, prices are higher, production costs are higher, and refinery investment per barrel is higher, but return on investment is about the same.

The operating costs discussed above reflect very little of the costs incurred to operate retail establishments in California. Retailers pay a "dealer tank wagon (DTW) price" for gasoline. The DTW price represents the costs and profits to produce and get the gasoline to the retail establishment. Retailers sell the product to consumers at a price higher than DTW to cover their costs and profits. Table B.2 shows the retail markup (retail price excluding taxes minus DTW price) for California versus the United States for the last several years. The comparison is for all grades, all formulations. Individual years can vary, as in 1996 when the CaRFG transition was occurring, but California is generally in line with the rest of the United States. As is discussed in Chapter 6 from Assessment of Summer 1997 Motor Gasoline Price Increase, PADD 5 retail minus DTW prices average well above the other PADD's, but California is not the source of the PADD 5 aggregate difference. Retail margins in areas like Alaska, Hawaii, and rural areas run higher than the U.S. average.

In conclusion, both taxes and the higher cost of refining on the West Coast seem to explain much of California's higher prices for gasoline.

File last modified: June 9, 1998

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