On August 6, a fire tore through Chevron’s Richmond refinery. The Richmond refinery is located in Northern California, a few miles outside of San Francisco, and is the third largest refinery in California. Wholesale gasoline prices in California, as measured by the Los Angeles Harbor spot price for regular reformulated California-blend gasoline, jumped nearly 15 cents per gallon overnight, from $3.03/gal to $3.19/gal. Three days later wholesale gasoline prices peaked, up 28 cents per gallon from the day just prior to the fire.
Gasoline prices at the pump also rose after the fire. One week after the fire, average retail prices for regular reformulated gasoline in and around San Francisco were up about 28 cents per gallon. Even now, three weeks after the fire, average retail prices in the San Francisco area continue to be up by about 28 cents per gallon.
Senator Dianne Feinstein (D-Calif) recently sent a letter to the Federal Trade Commission calling for an investigation into potential market manipulation in the aftermath of the fire. I am not convinced market manipulation is the explanation for the higher prices we’re seeing. My close look at publicly available data suggests the price movements are more consistent with the fundamentals of supply and demand than market manipulation:
- While wholesale prices in California rose quickly relative to prices in the rest of the country, they also soon fell back to their normal differential. A back-of-the-envelope calculation using data from the Energy Information Administration (EIA) compares Los Angeles Harbor spot prices for regular reformulated RBOB gasoline to U.S. Gulf Coast regular conventional gasoline. Comparing wholesale prices in California to a benchmark makes sense because it takes into account movements in wholesale prices attributable to other underlying factors, such as crude oil prices. By this comparison, wholesale prices for gasoline in the Los Angeles Harbor seem to have returned to historical differentials to wholesale prices in the U.S. Gulf Coast just one week after the fire.
- Refineries produce a whole suite of refined products from their crude slates, including California-blend gasoline, non-California-blend gasoline, jet fuel, and diesel. Data from the California Energy Commission (CEC) suggest that other refiners of wholesale gasoline in California responded to the Richmond refinery fire by expanding production of California-blend reformulated gasoline (CARB RFG) and decreasing the production of other gasoline products such as non-California-blend gasoline. Data from the CEC also show that, refiners drew down inventories of California-blend reformulated gasoline the week after the fire.
- While wholesale and retail prices for gasoline in California remain higher post-fire, the price of the primary input into gasoline – crude oil – is also notably higher as well. Since the start of July, EIA data show that the spot price for Brent crude oil has risen by about $18.50/barrel, or roughly 44 cents per gallon (there are 42 gallons in a barrel). As a point of comparison for what this means for the price of gasoline at the pump, between the start of July and the end of August, the average retail price for regular reformulated gasoline in San Francisco and the average retail price for regular reformulated gasoline in Houston are both up by about 37 cents per gallon ($0.37/gallon and $0.38/gallon, respectively).