By Samantha Zee

Jan. 29 (Bloomberg) -- California gasoline production dropped this month to
its lowest level since October 2004, leaving stockpiles 26 percent short of
year-earlier levels, as refiners cut output to undertake maintenance programs.

While production climbed about 6 percent during the past two weeks, shortages
of the state’s blend of unleaded gasoline may persist as West Coast-based
refiners cut output of the fuel in favor of others with higher profit margins.

The decline is helping drive state-wide gasoline prices above $2 a gallon for
the first time since November. The reduced output comes as refiners including BP Plc, Exxon Mobil Corp., and Chevron Corp. have either reported production disruptions at
their plants or cut processing rates for maintenance and repairs.

“There is a fallacy that there’s enough fuel around,” said Bob van der Valk,
director of the U.S. branded license program and fuel pricing analyst at 4Refuel
Inc., a Canadian fuel-management company. “It used to be that gasoline was a
refiner’s money-maker, it was a no-brainer, but that hasn’t been true this past
year. Refiners have been making more distillates, like heating oil and diesel,
because there was more money there.”

Refiners in California produced 6.89 million barrels of gasoline in the week ended Jan. 23, up
2.2 percent from the previous week, according to the California Energy
Commission. Output in the week ended Jan. 9 was the lowest since October 2004.

Refinery stocks of gasoline in California are 26
percent below year-earlier levels, according to the data. Total distillate production in the week ended Jan. 23,
was 2.33 million barrels, up 11.3 percent from a week earlier, Commission data
show.

Fuel shortages

Shortages of available gasoline supply may be compounded after Big West of
California LLC said it is curtailing operations at its Bakersfield refinery in
Southern California.

Since Big West’s parent Flying J Inc. filed for bankruptcy Dec. 22, the
refinery, which can process 68,000 barrels of crude a day, hasn’t had cash
available to purchase oil needed to operate the plant.

“With large refiners such as BP out, in early January we estimated about 21
percent of the state gasoline supply was shut down,” said Charles Langley,
publisher and gasoline analyst at Utility Consumers’ Action Network, a consumer
advocacy group.

Supplies of gasoline stored on the West Coast stand at 28.2 million barrels,
18 percent below year-earlier levels, according the U.S. Energy Department said
in a report this week.

“Big West closing operations means that it takes away competition and
vitality in the market,” Langley said. “We’re seeing retail prices going up with
the shutdown of the Bakersfield refinery and also the possibility of a strike.”

Refinery Strike

Fuel production could be disrupted nationwide by a strike at U.S. refineries
by the United Steel Workers of America. The union said it will reject a third
contract offer by Royal Dutch Shell Plc, which
is negotiating on behalf of refiners across the country. The current agreement
expires at 12:01 a.m. Feb. 1.

“Usually the whiff of a refinery problem sends prices racing up, but demand
is very low,” Langley said. “Consumers last year got spanked at the tank and
said ‘we’re tired of being bent over an oil barrel’; they changed their habits.”

Pump prices in California rose above $2 a gallon this month for the first
time since November. The average price of self- serve regular gasoline in the
state is $2.105 a gallon, up 27 cents, or 15 percent, from a month earlier, AAA, the nation’s biggest motoring group, said in its Daily
Fuel Gauge report. The average price a year earlier was $3.1431 a gallon. Prices
climbed to a record of $4.61 on June 19 last year.

Because of clean-air mandates required by the state and the Environmental
Protection Agency, California’s gasoline is different from the fuel sold in
other parts of the U.S. The state makes about 90 percent of the gasoline it
uses, which means any refinery problems can send prices soaring.

At this time of year refiners deplete supplies of winter-grade fuel and
switch to produce summer fuel to ensure supplies to terminals by March 15 and
gasoline stations by April 15.

“This move can cause havoc in the market,” van der Valk said. “This year,
maybe gasoline will drive crude oil prices.”

To contact the reporter on this story: Samantha Zee in Los Angeles at szee@bloomberg.net

Last Updated: January
29, 2009 22:13 EST