California Gasoline Consumers Hurt by Few Suppliers, Outages

October 26, 2012

Conventional economic wisdom dictates that lack of competition can handicap the local market it functions in. California is riddled with these market fractures. This is particularly evident in the state's energy economy. Since 1980s, the number of refiners operating in California has decreased by half; as a result, gasoline prices are prone to price spikes, which can impair the local economy, says the Los Angeles Times.

When it comes to the gasoline market, the Golden State is largely protected from external competitions -- paralleling the oligopolies present in the oil producing economies of the Middle East.

  • The state's strict clean-air rules mandate a specially formulated blend used nowhere else in the country.
  • Producers in places such as Louisiana or Texas could make it, but there are no pipelines to get it to the West Coast quickly and cheaply.
  • As a result, virtually all 14.6 billion gallons of gasoline sold in California last year were made by nine companies that own the state's refineries.
  • Three of them control 54 percent of the market.

The lack of competition is manifested at the retail sector.

  • Around 85 percent of gas stations offer brands such as Chevron, Arco, Valero or Mobil.
  • Additionally, the pump prices are directly or indirectly controlled by refiners.

In contrast, in other states, such as Texas, independent, non-branded fueling posts make up around 50 percent of the market, thus more competition, which buffers against price volatility that harms local economies.

Given that gas is an integral input for numerous economic activities, by extension, it means that the higher prices will translate to a higher cost of doing business in California. Further complicating the picture, the current push on limiting greenhouse gas emission and promoting alternative fuel opportunities may coerce nearly eight of California's refineries to shut down in the coming years. This thrusts California's energy supply edifice into a more fragile state, characterizing the energy marketplace with monopolistic features. In the short run, it makes the market vulnerable to price hikes, and in the long run, this can have major detrimental ramifications.

Source: Ken Bensinger, "California Gasoline Consumers Hurt by Few Suppliers, Outages," Los Angeles Times, October 22, 2012.

 

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