Governor Brown Solves California’s Gas Price Problem

Though the record gasoline prices paid by Californians last week received national attention, it was from the beginning strictly a California problem.

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California has separate gasoline requirements from the rest of the nation, and also requires a different, more-expensive fuel for summer sales relative to winter. Because refiners don’t want to be stuck holding the summer blend through the winter, inventories of summer blend are intentionally low this time of year. That creates a problem when two of the main refineries producing the California summer blend get knocked out, as we just observed.

Source: ExxonMobil.

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But two important developments have changed the picture. First, the Torrance refinery was back in operation by Friday. Second, on Sunday Governor Jerry Brown (D-CA) directed the California Air Resources Board to allow use right now of the winter blend instead of waiting as usual until the first of November, a move that the Board has implemented. This allows existing stocks of the winter fuel to be sold to add to the supply of the summer blend. Moreover, because a greater volume of the winter fuel can be created from a given barrel of oil, Brown’s move allows more California gasoline to be produced each week. The Governor’s statement claimed that “allowing an early transition to winter-blend gasoline could increase California’s fuel supply by up to an estimated 8-10 percent with only negligible air quality impacts.”


Premium of Los Angeles bulk delivery California formulation over New York Harbor RBOB. Source: Bloomberg.

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Several reporters have asked me what economic effects this episode may have. My answer is they should be pretty limited– I’m expecting the retail price to come down almost as quickly and dramatically as it went up. The spike will remind car buyers that getting saddled with a gas guzzler could be a decision they’ll come to regret. But my view is that most Americans were already pretty tuned in to that reality.

The episode may also serve as a reminder that the more layers of regulation we put on commerce, the less resilient is the system when something goes wrong.

This post was originally published at Econbrowser and is reproduced here with permission.