Gas Prices First Wave of Price Inflation

The WealthCycles Staff

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.

Gasoline station owners in the Los Angeles area including Costco Wholesale Corp. (COST) are beginning to shut pumps as the state’s oil refiners started rationing supplies and spot prices surged to a record.

In addition to the big discount players, independently owned, mom-and-pop gas stations and convenience stores were shut down, Bloomberg reported:

“I can get gas, but it’s going to cost me $4.90 a gallon, and I can’t sell it here for $5,” Ravi said. “If you come here right now, I’ve got some diesel left. That’s all. My market is open, but no gas.”
“We’re going to start shutting pumps Friday,” Sam Krikorian, owner of Quality Auto Repair in North Hollywood, said by phone yesterday. “Gas is costing me almost $4.75 a gallon with taxes. There’s no sense in staying open. The profit margins are so low it’s not worth it.”

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.

Product supply in California has tightened, especially in Southern California, due to refinery outages,” Bill Day, a Valero spokesman at the company’s headquarters in San Antonio, said by e-mail.
Exxon’s Torrance refinery is restoring operations after losing power Oct. 1. Phillips 66 (PSX) is scheduled to perform work on gasoline-making units at its two California refineries this month, two people with knowledge of the schedules said. A Chevron Corp. (CVX) pipeline that delivers crude to Northern California refineries was also shut last month due to elevated levels of chloride in the oil.

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.

Publicly available data appears to confirm that market fundamentals are not to blame for rising gas prices in California," she wrote, citing state data that showed gasoline production last week was almost as high as a year ago and that gasoline and blending components were equal to this time last year.

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:

To think an increase in the rate of contracting vaporizes barrels of oil is quite silly; if anything, the higher prices encourage suppliers that previously unprofitable expansions in exploration may now be justified. Additionally, the higher prices encourage self-imposed rationing: people choose to drive less, therefore short-term supply is broader.

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.

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