Tight Supply of Gas Sparks Rise in Wholesale Prices

While the world is awash in crude oil, Californians are facing tight supplies of gasoline that have already sparked a sharp run-up in some wholesale prices and are likely to result in higher prices at the pump.

The sudden reversal of a three-month decline in state gasoline prices is described by oil company officials as a temporary problem caused by shutdowns and malfunctions at several refineries in the Los Angeles area. Motorists are not expected to have difficulty obtaining gasoline, they said.

They said that up to a dozen tanker ships, attracted by a price gap of as much as 20 cents a gallon between the Houston and Los Angeles markets, are steaming toward California with gasoline that will ease the tight supplies over the next few weeks.

But the irony of gas prices rising as the price of crude oil continues to fall has angered some local distributors and service station owners, who argue that the shortage may be contrived by hard-pressed refiners to boost revenues.

Retailers and middlemen say the price they pay for gasoline has jumped as much as 19 cents a gallon since mid-March and that they have had occasional difficulty getting supplies.

“My view is that crude prices are coming down, so to keep profits up they’re just tightening up the supply,” said Ron Appel, president of United Oil, a gasoline distributor and operator of 14 independent and major-brand service stations in Los Angeles and Long Beach.

Month’s Increase

Statistics compiled by the Lundberg Survey, a Los Angeles firm that tracks gasoline prices nationally, show that the local average pre-tax “rack price” for unleaded regular had spurted to 61.3 cents a gallon on Tuesday from 47.6 cents on March 14.

The rack price is that paid by independent station operators and distributors, the first affected by swings in supplies. As a result, the independents, who normally have the lowest retail prices, are now charging slightly more than the name-brand stations and stand to lead prices up instead of down.

“There’s no rhyme or reason for it,” said Will Mandelberg, owner of M & M Oil, an independent 12-pump station in Long Beach. He said he will have to boost retail prices 4 to 5 cents a gallon when he buys his next tank of gasoline today or Monday.

The most recent Lundberg survey of retail prices was taken March 21 and showed no increase in pump prices in the Los Angeles area, the nation’s largest gasoline market. The next survey is scheduled to be conducted today.

Tail Wagging the Dog

Owner Dan Lundberg said that although independents account for only about 8% of sales, “They are the tail that wags the retail dog. The relationship of the rack price to (the price paid by name-brand stations) is normally pretty close.”

The trade publication Oil Daily showed the Los Angeles rack prices ranging from 59.5 cents to 63 cents a gallon for leaded regular on Wednesday, sharply higher than a range of 42 cents to 50 cents in 21 other markets. San Francisco-area prices are described as similar to those in Los Angeles.

The West Coast shortages are especially ironic because California producers of crude oil say the state has a worse glut of crude than anywhere in the country, partly because there are limited ways to export the oil produced here, and the state has been flooded with Alaskan oil in recent months.

Several Factors

Industry officials say the coincidental scheduling of routine maintenance and conversion to other products at several area refineries at the same time, coupled with a fire at Unocal’s Los Angeles refinery and mechanical problems at other refineries, including Chevron’s in El Segundo, sharply scaled back the processing of crude oil in California during March.

Despite the view of some dealers that such explanations are not sufficient to explain the current rise in prices, others are less skeptical. Robert Ernst of Ernst Distributing said: “I don’t think they’ve contrived it. A physical event occurred and they’ve capitalized on it,” referring to the production problems.

Statistics maintained by the Department of Energy show that stocks of gasoline in the Western states fell by 2 million barrels in March, a decline that Texaco officials said explains the current tight supplies.

Not Called a ‘Shortage’

“Our people are loathe to use the term ‘shortage,’ ” an official at another company said. “As soon as people think there’s a shortage, everyone runs to the pump and fills up their tanks and then there really is a shortage. Supplies are tight, but it’s correcting itself.”

A fire March 6 at Unocal’s 108,000 barrel-a-day refinery in Los Angeles will cost the company a third of the refinery’s production for two months, ending in early May, a company spokesman said. That alone represents 3% of the consumption in the Western states.

Chevron had an unscheduled three-week shutdown at its El Segundo refinery because of problems in a cracking unit, creating shortages that have forced the company to truck oil from other refineries to supply dealers, said James Huccaby, director of pricing at Chevron USA. The refinery was back in operation this week.

None of the companies would discuss the prices they charge to their own major-brand dealers. But prices reported by Oil Daily in recent days show almost daily increases of a penny or so per gallon in California and other Western states and a general pattern of continued decreases in other parts of the country.

“They all went down about 30 cents in the first two months (of the year) and now most of them have gone back up 15 cents,” Ernst said.

How much increase will be passed on to consumers before the tightness in supply is eased remains to be seen. However, the rise in California wholesale prices is occurring as retail gasoline prices nationally appear to have neared bottom.

Helped by a seasonal increase in demand for gasoline, supplies are being brought into line with demand, Huccaby said.

“Overall, prices have definitely stabilized compared to the previous six to eight weeks,” he said.