California Gasoline Prices

Presentation by

Commissioner David A. Rohy, Ph.D.
California Energy Commission


Before the

Senate Energy, Utilities and Communications Committee
October 28, 1996
San Diego, California



Overview/Introduction



Figure 1 -- California Gasoline Demand


The demand for gasoline in California reached 13.4 billion gallons in 1995 and is expected to top 13.7 billion gallons by the end of 1996.

Demand has been relatively flat over the last six years, although increasing slightly each year since 1992.

California's gasoline demand in 1995 was 11.2 percent of the nation's total, making it the largest market in the country.



Figure 2 -- California Regional Gasoline Demand


The demand for gasoline in Southern California, as in the rest of the state, has been relatively flat over the last several years, peaking at 7.5 billion gallons in 1990, or 59 percent of the state's total demand. This percentage had declined to 57 percent in 1995.

Los Angeles County demand, as a percentage of the state's total demand, has fallen by 4 percentage points over the last five years.

The other counties in the Southern California region have had relatively stable gasoline demand over this same time period, with San Bernardino and Riverside counties seeing an increase of 0.5 percent each in gasoline demand.



Figure 3 -- Southern California Gasoline Demand By County


The southern region of the state is composed of seven counties: Ventura, Los Angeles, San Bernardino, Orange, Riverside, San Diego and Imperial.

Los Angeles County consumes 48 percent of this region's gasoline.

San Diego County is the third largest consumer in the region at 15 percent.



Figure 4 -- Major Product Pipelines


The primary method of movement of petroleum products to local distribution terminal in the state is through pipelines, the majority of which are owned by the Santa Fe Pacific Pipeline Company.

Northern and Southern California are not connected by any petroleum product pipeline. Product movement between the two regions is accomplished through the use of marine vessels and tanker trucks.

San Diego County receives about 92 percent of its gasoline from a pipeline that runs from the Los Angeles refining center to distribution terminals located in Mission Valley and San Diego Harbor. The rest of the gasoline (about 8 percent) is delivered to the area by tanker trucks.

There are no refineries located in San Diego County.

The shipping cost by pipeline from the Los Angeles refineries to the San Diego terminals is about 1 cent more per gallon than the cost to ship to the Los Angeles area terminals from the same refineries.

Shipping gasoline to the San Diego region by tanker truck costs from 2 to 4 cents per gallon.



Figure 5 -- California's Top Gasoline Suppliers


California's gasoline needs are supplied to the state by refiners, traders and various distributors.

The top four suppliers, based on fuel taxes paid in 1995, are: ARCO, Chevron, Shell and UNOCAL.

These top four companies supply about 60 percent of the California gasoline market.

ARCO is the largest supplier at 18.5 percent, followed by Chevron at 16.9, Shell at 13.2, and UNOCAL at 11 percent.

Exxon is the only supplier who does not operate any branded retail outlets in either Los Angeles or San Diego Counties.



Figure 6 -- Type of Service Stations


A closer examination of the service station information for San Diego and Los Angeles Counties reveals that a larger percentage of the service stations are company owned and operated by the majors in San Diego County.

Majors can control both the retail and wholesale prices at these types of service stations, whereas the majors can only exert control over the wholesale price for the remaining number of branded outlets. The owners of this type of outlet determines the posted retail price.

Independents control the retail pricing of the unbranded outlets and the owners are able to purchase gasoline from a variety of suppliers.

Company owned service stations advertise the logo for one of the major oil companies, use the companies gasoline additive package, and are owned by that major.

Branded service stations advertise the logo for one of the major companies, use their additive package, but are not directly owned by the major.

Unbranded service stations do not advertise one of the major oil company logos, use a generic additive package, and are owned by independent business people.



Figure 7 -- Service Station Outlets


All of the majors, except Exxon, have a branded presence in San Diego and Los Angeles Counties.

If the assumption is that lower prices are a result of greater competition from independents (larger market share), then one would expect to see a larger percentage of unbranded retail outlets in Los Angeles County (compared to San Diego County).

Point in fact, the opposite is true. Unbranded outlets represent nearly 23 percent of the stations in San Diego County but only 17.6 percent in Los Angeles County.



Licensed Drivers in Southern California Region
Per Gasoline Station By County


This graph shows the number of licensed drivers in the Southern California region per gas station. There are more drivers per station in San Diego than in Los Angeles, by about 15%, as is true for Orange County. Other than Imperial County, the remaining areas are about the same as L.A. Put another way, there are less retail outlets per driver to choose from, leading to less stiff competition between stations.



Figure 8 -- California Retail Gasoline


There has been a great deal of discussion and speculation as to why the price of gasoline in San Diego County is so much higher than Los Angeles, the implication that the price is higher than it should be.

The Commission tested this assumption by looking at an statewide average retail gasoline price for January 1996, then calculating what the average price could be if the increase in price of crude oil (approximately 13 cents per gallon since January) and the additional cost of producing reformulated gasoline (assumed to be 8 cents) were added to the base price.

For purposes of this analysis, the dealer margin was unchanged, and the refiner margin was increased by 8 cents to account for the additional cost of reformulated gasoline.

This new calculated statewide retail price for gasoline was approximately $1.38 per gallon, for the second week in October.

The next step was to examine actual retail prices throughout the state to see how some of the other areas compared to the expected price.



Price Comparison -- October 11, 1996


Price comparisons for October 11 indicate that rack prices in L.A. are the reverse of those seen in San Diego. { blue, or bottom slice, is rack price; yellow is taxes, and orange is dealer}. In L.A., rack prices for unbranded are above those for branded (and possibly for dealer tank wagon) while in San Diego, branded rack prices show their traditional relationship of being higher than unbranded. This has an effect on the retailer, as can be seen by the top slice of each bar; in L.A. the branded retaileršs portion is almost twice that of the unbranded dealer, while in San Diego, the unbranded dealeršs portion is higher.

The Commission does not have data to make this comparison taking into account the dramatic price reductions which have hit the retail market in the last week or so, nor do we know if the price war in the L.A. region, with dramatic competition for market share, will persist or expand to other regions. The phenomenon does magnify any price differentials across regions.



Figure 9 -- Gasoline Prices in California, October 11, 1996


This figure illustrates that the retail price of gasoline in the San Francisco Bay Area is a couple of cents above the expected price, while San Diego is the same and Sacramento is a couple of cents less.

The Los Angeles area stands out as being well below the expected price (16 cents).



Market Comparison -- San Diego and Los Angeles