Somewhere around October 5, gas prices in California spiked overnight, with prices going up by 30 cents to 45 cents throughout the state. The immediate question on the minds of most California drivers was, why?
In fact, this is a question that is asked often in California, as the volatility of gas prices causes a range of emotions, from anxiety and anger to aggravation and annoyance. Because rising gas prices can have such a profound effect both on household finances and economic prosperity, let’s take a look at the various factors that can and have caused the price of gas to fluctuate so drastically.
The most obvious factors are the supply and demand of both gasoline and dollars. As reported by Bloomberg earlier this month, an interruption in gasoline supply from refineries led directly to reduced availability to retailers.
In addition to the big discount players, independently owned, mom-and-pop gas stations and convenience stores were shut down, Bloomberg reported:
The temporary shortage rippled through the entire West Coast market as demand for CARBOB—the unique blend of gasoline required under California’s restrictive air quality control standards—far outstripped the supply. Because of these regulations, and because California is cut off from access to pipelines available to most of the rest of the country, California is particularly susceptible to shortages in supply. This dilemma was compounded by the recent series of problems arising at various California refineries, according to a Reuters report.
Despite this ample evidence of limited supply and obvious supply chain interruptions, some observers believe there is a problem with basic market forces. On October 5, 2012, Reuters reported that some traders were reporting seeing signs of a squeeze in play as they anticipate the short supply. Following on the heels of that report, California Senator Diane Feinstein made a formal request to the Federal Trade Commission (FTC) to begin monitoring of the oil-trading markets to determine if collusion played a part in the dramatic price increases.
For consumers, however, the main question is how long they will have to continue to pay the price at the pump and what, if anything, can be done to ease the problem? Enter California Governor Jerry Brown. On Sunday, October 7, Brown commanded the state’s air pollution regulators to allow service stations to stock and sell winter-grade gasoline. By making winter-grade gasoline immediately available, rather than waiting a couple more weeks as dictated by state air quality regulations Brown made it possible for service stations to access the existing winter-grade stockpile of fuel, thus eliminating the short-term supply dilemma which was responsible for the price spike.
Indeed, according to the chart below, gas prices in California are coming down—albeit not nearly as quickly as they shot up.
Of course, the spectacle of politicians stepping up to “do something” every time gas prices shoot up, as Brown attempted, or call for an investigation, as Feinstein did, has become a trite and tiresome ritual. Typically the higher prices are blamed on “speculators,” those evil people who buy up supplies and hold them in the belief they’ll be able to sell them at a profit when prices go up more. As we wrote recently in Oil Speculation - Speculators Benefit Society, speculation is the market functioning as it is meant to function, determining appropriate prices and spurring increases or decreases in supply:
What California’s recent gas price surge does indicate is how quickly the effects of price inflation, the timetable pushed up by the now continuous Federal Reserve expansion of the currency supply, can overcome us. California’s unique regulatory environment creates a localized crimp in the supply hose, but that only means California is first to be hit by the inflationary wave. It signals time to head for high ground and anchor one’s future to something tangible, solid and lasting.