NCPA - National Center for Policy Analysis


July 1, 2004

Gasoline prices have fallen significantly nationwide -- 13 percent in the last month, according to economist Hal R. Varian. The exception is California, where prices have fallen much less. The reason is that California has its own special gasoline market.

  • Gasoline prices in California are 30 cents higher than the national average and are much more volatile because the state requires a special low-polluting blend of gasoline known as CaRFG (California reformulated gasoline), which is produced by only 13 in-state refineries.
  • In 2003 these refineries produced about 15 billion gallons, of which 14.8 billion gallons was consumed in the state.
  • Production capacity for CaRFG is closely matched to demand, and the demand for gasoline is relatively price insensitive -- a 10 percent increase in price typically reduces short-term demand by only 2 to 3 percent.

A recent study looks at some expensive measures or heavy-handed regulation that could deal with the problem, such as maintaining a strategic fuel reserve, regulating seasonal changes in gasoline mix, regulating refinery closures and using state gasoline purchases more strategically.

One market-based measure is to allow the importation of non-CaRFG gasoline into the state when CaRFG is in short supply.

Source: Hal R. Varian (University of California, Berkeley), "Parsing California Gas Prices," Economic Scene, New York Times, July 1, 2004; Severin Borenstein, James Bushnell and Matthew Lewis, "Market Power in California's Gasoline Market, CSEM WP-132, May 2004, University of California Energy Institute

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