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Gas prices likely to surge: Two major SoCal refineries down

California Refineries by output
Gas prices have surged at the wholesale with reports that Chevron's massive El Segundo refinery and Arco's equally monstrous Carson refinery were taken offline. The two refineries produce 27% of California's fuel.
 

Analysis

The result of the shutdowns means that the spot price of gasoline surged by 17¢ today on October 27th.  We watch the spot price closely because it is a good indicator of where prices are headed.  Spot gasoline is essentially surplus gasoline sold for "cash on the spot," and when the price of surplus gas goes up, it means there isn't a surplus anymore. 

The pie chart above shows why (See source data below).

Together, Chevron and Arco produce nearly half the gasoline consumed in the State of California on any given day. 

But in terms Southern California the percentage of market share is even bigger.

Whenever a major refinery has production problems, it will often start buying barrels of gasoline on the spot market in order to guarantee that its own retailers are supplied. However, Arco and Chevron have trading agreements with each other: when either of them runs out, they will supply the other fuel. What this means is that they can conceal a supply problem by avoiding spot fuel purchases, and a way of concealing a market vulnerability to the owners of spot gasoline.  But when both refineries go down, hiding their exposure from the market becomes difficult. 

A surge in the spot market almost always means a surge at retail pumps because the stations that buy spot market fuel are usually unbranded independent gasoline retailers.  Unbranded gas stations tend to sell the cheapest gasoline which forces the major brands to lower their prices in order to compete.  Chevron and Arco are bookends to the high-price and low-price branded gasoline market -- Arco maintains the price "floor" and Chevron maintains the price "ceiling." When both of these goliaths start raising their prices, then look out -- a major price hike is usually around the corner.

Sources: Reuters - Chevron expects repairs to take weeks.
               Reuters - British Petroleum says Carson refinery will conduct seasonal minntenance through November 15

 

 

 

Charles Langley is a public advocate and gasoline analyst at UCAN.org, the Utility Consumers' Action Network.  He can be reached at (619) 610-9006