Gasoline prices ready to hit new high in S.F.

San Francisco Chronicle
David R. Baker, Chronicle Staff Writer
Friday, March 30, 2007

San Francisco's surging gasoline prices stand poised to smash their old record of $3.36 for a gallon of regular, perhaps as early as today.

Some stations in the city already have passed that record, set last May.

Although San Francisco's average gasoline price reached $3.34 Thursday, individual stations were charging as much as $3.98.

And yes, that's $3.98 for regular. Want premium? At least one San Francisco station was charging $4.18 per gallon.

The national average for a gallon of regular stands at $2.62, up 48 cents since the end of January. California's average is $3.22, up 70 cents in the same period. No other state average tops $3 per gallon, although Hawaii might pass that mark this weekend.

Blame huge refinery profit margins, falling gasoline production, tensions with Iran and American drivers themselves, who are -- believe it or not -- buying more gas now than they did last year.

Just two weeks ago, it looked like San Francisco and the rest of the country would finally get a break at the pump. Prices for crude oil, gasoline's raw material, were falling. Refineries were almost done with their annual spring maintenance, which temporarily had cut the amount of gas they could produce. Market analysts predicted that the stunning late-winter run-up in prices would soon end. San Francisco's average even dropped for a few days.

Then escalating tensions with Iran forced crude oil prices sharply higher, almost 17 percent in 10 days. Mechanical problems kept hitting refineries throughout the country and in the Bay Area, shrinking the amount of gasoline on the market.

Throughout, refinery profit margins on the West Coast remained almost twice as high as they were last fall, adding to the price drivers pay at the pump. The difference between what West Coast refiners pay for crude and the price they charge for refined products has risen to $37 per barrel from about $20 last fall.

And all the while, drivers kept buying. The country now burns about 1.4 percent more gasoline than it did at the same time last year.

In other words, there's less gasoline available, but drivers are consuming more than before. The companies that sell it enjoy hefty profit margins, and they don't have any incentive to cut prices.

"If you can sell, relatively speaking, the same amount of your product at a higher price than at a lower price, you're probably going to sell at a higher price," said Sean Comey, spokesman for the AAA of Northern California Auto Club.

Consumer advocates charge that refiners are purposely restricting gas supplies as a way to drive up the price. They doubt that all the recent mechanical problems are real or require as much downtime as the companies say. And they note that no government agency polices refining companies to make sure their executives are telling the truth.

"They could well be making more money by not producing gas than they do when they produce gas, which is the scenario we saw in the electricity crisis," said Michael Shames, executive director of the watchdog Utility Consumers' Action Network in San Diego. "When you have a market that's so dysfunctional, you need to have more oversight."

Still, no one has been able to prove manipulation. And many experts say the huge margins for refiners simply represent the dynamics of the market, where supply is squeezed and demand keeps rising.

For all the times California officials have investigated gasoline prices, they have never been able to demonstrate that refiners are gaming the market. The state attorney general's office has one such investigation under way right now but has not reached any conclusions.

"A lot of people have invested a lot of time on this, and a lot of those people have subpoena power," said Tupper Hull, spokesman for the Western States Petroleum Association. "And they haven't found anything wrong."

Yet, even some oil executives acknowledge that California's gasoline market is broken, or at least seriously warped.

The state uses its own unique, pollution-fighting blend of gasoline, made by a limited number of refineries. That limited supply makes the state prone to wild swings in price and is one of the main reasons Californians typically pay more at the pump than other Americans.

San Ramon's Chevron Corp. now controls about one-quarter of the state's refining capacity. CEO David O'Reilly said the country needs to cut the number of specialized gasoline blends in use, which would allow gasoline to flow across state borders much more easily. That, in turn, would minimize price spikes and give California access to more fuel. He has made that argument for years.

"I think it's unfair for people to assert that we're trying to take advantage of something when we've been pointing out, for years, that this is the wrong way to go," O'Reilly said.

But Chevron, like other local refiners, benefits from California's perpetually tight market. And when they talk with Wall Street, the company's executives sometimes boast about how profitable their West Coast operations have become, even though the vast majority of the company's profits come from selling crude oil.

"The Chevron brand continues to garner both increased market share and pricing power in the marketplace," Executive Vice President Mike Wirth told stock analysts at a conference earlier this month.

Chevron plans upgrades to its California refineries that could increase their gasoline production by 840,000 gallons per day. And O'Reilly continues to argue that the government can fix the problem by standardizing gas blends.

"We've advocated for change at a state level," he said. "But advocating and getting the regulations changed are two different things."

How long will the gasoline price increase last? Analysts say that will depend on refinery output and the international politics influencing the price of crude oil.

Refineries elsewhere in the nation are starting to increase the amount of gas they produce, according to the latest federal government figures, but California still lags. As for oil, any further saber-rattling between Iran and the West could easily shove up the price further.

E-mail David R. Baker at dbaker@sfchronicle.com.

This article appeared on page A - 1 of the San Francisco Chronicle