GASOLINE PRICES RISE IN CALIFORNIA

This story (registration required) does a good job of illustrating how being so close to refinery capacity can contribute to gasoline price spikes. Although prices this summer are not high either historically or adjusted for inflation, they are exhibiting some of the usual “increase before driving holidays” pattern. The fact that refinery production is so close to total refining capacity means that any refinery outage could disrupt supply and lead to an unanticipated price spike. The article also does a nice job of pointing out that reformulated gasoline, as mandated by the EPA in areas with air quality problems, limits the extent of the market by making non-California gasoline less substitutable for California’s reformulated gasoline. In the midwest we have enough different reformulations that we call this the “boutique fuels” problem, which contributed to the price spikes we saw in 2000 and 2001, but not this year (touch wood) because we have not had any refinery outages.