Report on California Gasoline Prices Attorney General Bill Lockyer

March 2004

During the first three months of this year, California’s history of gasoline price spikes has repeated itself – again.

Prices in California reached records levels in the first week of March. The average price of regular gasoline climbed to an all-time high of $2.20 a gallon in Los Angeles, with Bay Area prices close behind at an average of $2.16 a gallon. Nationally, prices also have risen to an average of over $1.70 a gallon, nearing the record of $1.75. Still, $1.70 is more than 30 percent below the price paid by some California drivers.

In November 1999, after gasoline prices in California rose dramatically to peak at $1.62 a gallon, the Attorney General convened a special Task Force on Gasoline Pricing in California. The Task Force issued its report in May 2000. The report focused both on market structure and supply issues. While surrounding circumstances have changed, the market conditions described in the report still exist – most notably tight supplies of refined gasoline and a lack of competition among the companies that produce and sell gasoline. These conditions continue to make California susceptible to chronic price spikes.

High gasoline prices drain from the pockets of working families money that could be used for food, clothing and health care. Additionally, they erode the competitiveness of California’s industries. A recent analysis of gasoline prices by the Attorney General’s Office suggests the following:

• California’s gasoline market remains more concentrated and less competitive than the key refining areas east of the Rocky Mountains that supply the rest of the United States. Seven oil companies now control 98 percent of California’s refining capacity, and market 90 percent of the gasoline they refine through their own retail networks.

• Short-term supply problems make California especially vulnerable to price spikes. West Coast refiners maintain lower inventory levels relative to consumption than refiners in the rest of the United States and have reduced inventories in recent years.

• The change over from MTBE to ethanol has reduced California’s gasoline supply by as much as 10%. Supplies also can decrease as refiners switch from making their winter blend to their summer blend of gasoline.

• The price of crude oil has been trending upward. According to the federal Energy Information Administration, spot-market crude traded at $36.08 barrel on February 27 of this year, compared to $22.37 on March 1, 2002.

• There have been several refinery outages in California, reducing supply and driving up prices.

• Demand for gasoline in California continues to rise. The California Energy Commission projects that by 2013 annual gas consumption will increase by 14 percent, topping 17 billion gallons.

• Oil companies’ margins (costs-plus-profit) in California continue to far surpass the national average, especially at the refining stage. And the margins in California jump dramatically in the first three months of the year.

• California faces long-term supply problems as demand for gasoline rises. California has shifted from being a net exporter to a net importer of refined gasoline. Meanwhile, the state’s geographic isolation from other refining centers creates challenges for meeting the state’s import needs.

The market conditions driving high gasoline prices in California are deeply rooted. It is unrealistic to suggest there is a quick fix. To the extent possible under existing laws, the Attorney General has sought to prevent oil company mergers and unfair business practices from making the marketplace even more concentrated and less competitive. The Attorney General will continue to investigate any unlawful conduct that arises in California’s gasoline market.

The Attorney General’s reports on gasoline pricing practices also have sought to broaden understanding of the problems facing the state. Without changes in public policy that address market conditions, California will not rid itself of high gasoline prices. Policymakers must begin taking the steps necessary to increase competitiveness, supplies and fuel conservation. They should continue to examine ways to cheaply and expeditiously import refined gasoline into the state, via pipeline or other means, and to reduce California’s petroleum dependence through increased fuel economy and non-gasoline based technology.

Annual Average Retail Regular Grade Gasoline Prices California vs. Rest of U.S.

1986 - 2004

California Rest of U.S.

1988

1986

1990

1989

1991 1992

1995

1993 1994

1997

1996

1999

1998

2000

2004

2001 2002

1987

2003

200¢

180

160

140

120

100

(Cen

ts p

er G

allo

n)

80 0 6 12 18

Difference

1988

1986

1990

1989

1991 1992

1995

1993 1994

1997

1996

1999

1998

2000

2004

2001 2002

1987

2003

(Cen

ts p

er G

allo

n)

25¢

20

15

10

5

0

(5)

(10) 0 2 4 6 10 12 14 168

Note: All figures include taxes on a California basis. Data through February 2004. Source: API; CEC; EIA; OGJ.

CHART 1

18

CHART 2

Annual Average Retail Regular Grade Gasoline Prices In 2003 Dollars*

1986 - 2003

California Real Retail Price

(Excluding Taxes)

0 6 12 70

80

90

100

110

120

130

(Cen

ts p

er G

allo

n)

1986 1987 19881989 1990 1991 1992 1993 1994 1995 1996 1997 1998 19992000

2002

2001

2003

140¢

Annual Percent Change

0 2 4 6 8 10 12 14 16 (30)

(20)

(10)

0

10

20

30

(Per

cent

Cha

nge)

1986 1987 19881989 1990 1991 1992 1993 1994 1995 1996 19971998 19992000

2002

2001

2003

40%

*Adjusted for inflation using CPI for all items, US city average, base period 1982-1984 recalculated for 2003 dollars.

Source: BLS; EIA.

Estimated Breakdown of Gasoline Costs and Margins* January 1999 - February 2004

Refinery Margin

Crude Oil Cost

Wholesale & Retail Margin

$0.51

$0.80

Feb'04

$0.10

0 6 12 18 24 30 36 42 48 54 60 66 ($0.20)

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

(Dol

lars

per

Gal

lon)

* Regular Grade.

20041999 2000 2001 2002 2003 Jul Jan JulJan Jul Jan Jan Jan Jul Jul Jan

Note: "Wholesale & Retail Margin" includes distribution costs, marketing costs, and profits. Source: CEC.

CH

ART 3

Quarterly Average WTI Crude Oil Spot Prices 1988 - 2003

Storm

EnGul

d of f War

Asia Decline/

Demand/ OPEC Cuts

War Ira

Desert Increased

ersupply

Sept.Attac

Ov

11 ks

inq

Valdez Ta

Snker pill

(Dol

lars

per

Bar

rel)

$40

35

30

25

20

15

10

5

0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Platts.

CH

ART 4

Monthly Average Retail Regular Grade Gasoline Prices California vs. Rest of U.S.

January 1996 - February 2004

California

Rest of U.S. (Cen

ts p

er G

allo

n)

200

180

160

140

120

100

80 0 1996 12 1998 36 1999 48 2000 60 2001 2002 84 2003 91997 24 72 2004 6

220¢

Difference

(California Below Rest of U.S.)

(California Above Rest of U.S.)

(Cen

ts p

er G

allo

n)

50¢

40

30

20

10

(10)

(20) 0 1996 12 1997 24 1998 36 1999 48 2000 60 2001 72 2002 84 2003 962004

0

Note: All figures include taxes on a California basis. Source: API; CEC; EIA; OGJ.

CHART 5

Weekly Average Retail Regular Grade Gasoline PricesCalifornia vs. Rest of U.S.

January 1999 - February 2004

0 6 12 18 24 30 36 42 48 54 60Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan 1999 2000 2001 2002 2003 2004

California

Rest of U.S.

80

100

120

140

160

180

200

(Cen

ts p

er G

allo

n)

220¢

Difference

(California Above Rest of U.S.)

(California Below Rest of U.S.)

¢60

45

30

15

0

(15)

(Cen

ts p

er G

allo

n)

0 6 12 18 24 30 36 42 48 54 60Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan 2004 1999 2000 2001 2002 2003

Note: All figures include taxes on a California basis. Source: API; CEC; EIA.

CHART 6

Composition of a Gallon of Gasoline* California vs. Rest of U.S.

1999 vs. 2003

49¢

16¢ 3¢

41¢

2¢ 2¢

150¢

15¢

1¢

77¢

41¢

6¢

9¢ 112¢

180¢

134¢

42¢

22¢

12¢ 8¢

46¢

4¢

19¢

26¢

7¢

71¢

50¢

9¢

Taxes

Retail Margin**

Marketing Margin

Reformulation Margin

Crude Cost

Refining Margin

California (99) 0

25

50

75

100

125

150

175

(Cen

ts p

er G

allo

n)

* Regular grade. ** Retail margins generally are higher for midgrade and premium grade gasoline.

Source: CEC; EIA; Lundberg; Platts.

200¢

Rest of U.S. California California Rest of U.S. 1999 2003 C

HAR

T 7

Composition of a Gallon of Gasoline* State of California

January 1999 - February 2004

Taxes Retail Margin** Marketing Margin Reformulation Margin Crude Cost Refining Margin

0 4 8 12 16

0

25

50

75

100

125

150

175

200

(Cen

ts p

er G

allo

n)

* Regular grade. ** Retail margins generally are higher for midgrade and premium grade gasoline.

Source: CEC; EIA; Lundberg; Platts.

1999 Q1Q4Q1 Q2 Q3Q4Q1 Q2 Q3 Q4Q1 Q2 Q3Q4Q2 Q3Q1 Q2 Q3 Q1Q4

2000 2001 2002 20042003 20

225¢

CH

ART 8

Composition of a Gallon of Gasoline* State of California

December 2003 - February 2004

73¢

22¢ 4¢ 9¢

48¢

5¢

192¢

9¢ 7¢

20¢ 4¢

79¢

49¢

161¢ 168¢ 3¢

50¢

12¢

36¢

10¢

81¢

Taxes Retail Margin** Marketing Margin Reformulation Margin Crude Cost Refining Margin

0 0

25

50

75

100

125

150

175

200

225

(Cen

ts p

er G

allo

n)

* Regular grade. ** Retail margins generally are higher for midgrade and premium grade gasoline.

Source: CEC; EIA; Lundberg; Platts.

250¢

February 2004 December 2003 January 2004

CH

ART 9

CHART 10

California Refiners of Motor Vehicle Transportation Fuels

2003

ChevronTexaco ConocoPhillips Shell Tesoro Valero

SF Bay Area

Kern Shell*

Bakersfield

BPAmoco ChevronTexaco Conoco Phillips ExxonMobil Paramount** Shell Valero

Los Angeles

* Refinery is scheduled to close on October 1, 2004. ** Does not manufacture finished gasoline.

Source: OGJ.

CHART 11

California Refiners That Produce Gasoline As of January 1, 2004

Cumulative Percent of Total

Refining Capacity

(Barrels/Day)

Percent of Total

(Percent)

(1) (2) (3)

1. ChevronTexaco 485,000 26.1% 26.1%

2. Shell* 316,300 17.0 43.1

3. ConocoPhillips 253,000 13.6 56.7

4. BP 247,000 13.3 70.0

5. Valero 223,500 12.0 82.0

6. Tesoro 161,000 8.7 90.6

7. ExxonMobil 149,000 8.0 98.7

8. Kern

Total

25,000

1,859,800

1.3 100.0

100.0% 100.0%

* Capacity will be reduced by 65 MBD upon closure of Shell's Bakersfield refinery on Oct. 1, 2004. Source: OGJ.

CHART 12

California Motor Gasoline Marketers 2003*

Cumulative Percent of Total

Gallons Sold**

Percent of Total

(000 Gallons) (Percent) (1) (2) (3)

1. BPAmoco 3,010,310 20.3% 20.3%

2. ChevronTexaco 2,712,080 18.3 38.6

3. Shell 2,234,503 15.1 53.7

4. ConocoPhillips 2,180,476 14.7 68.5

5. Valero 1,380,302 9.3 77.8

6. ExxonMobil 1,017,834 6.9 84.7

7. Tesoro 699,028 4.7 89.4

8. Tower Energy 363,238 2.5 91.8

9. Petro-Diamond 273,734 1.8 93.7

10. New West Petroleum 250,556 1.7 95.4

11. Kern Oil & Refining 110,255 0.7 96.1

12. W.A. Dwelle 103,682 0.7 96.8

13. TNB, Inc. 75,331 0.5 97.3

Others

Total

395,144

14,806,474

2.7 100.0

100.0% 100.0%

* Estimated. Actual data available through October 2003. November and December 2003 estimated based on share of those months' volumes of total volumes for the period 1999 - 2002.

** These volumes are based on "Taxable Sales" as defined by the State of California. Because taxes are recorded prior to final sales to retailers and consumers, the volumes reported by the State do not match perfectly with sales to retail dealers or consumers.

Source: Pac West.

CHART 13

Projected California Gasoline Supply Loss Due to Switch to Ethanol

2004

Projected Impact (MB/D) (Percent)

(1) (2)

Gasoline Demand (e) 980

Loss of MTBE (108) (11%)

Gain from Ethanol 59 6%

Loss of Components (49)

Net Loss

(5%)

(98) (10%)

(e) = Estimated.

Source: CEC; EIA.

Inventories of Finished Motor Gasoline* January 1998 - February 2004

PADD I - IV

PADD V

6

8

10

12

14

16

18

20

22

24

26

(Day

s of

Con

sum

ptio

n)

* Due to EIA reporting, Finished Motor Gasoline includes MTBE blended into reformulated gasoline. Does not include ethanol. Note: PADD V is comprised of AK, AZ,CA, HI, NV, OR, and WA. PADD I - IV includes all other states.

Source: EIA.

1998 Jan Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jul Jan

1999 2000 2001 2002 2003 2004

28

CH

ART 14

Inventories of Total Motor Gasoline*January 1998 - February 2004

PADD I - IV

PADD V

(Day

s of

Con

sum

ptio

n)

34

32

30

28

26

24

22

20

18

16 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan

1998 1999 2000 2001 2002 2003 2004 * Includes Finished Motor Gasoline and Motor Gasoline Blending Components. Does not include ethanol.

Note: PADD V is comprised of AK, AZ,CA, HI, NV, OR, and WA. PADD I - IV includes all other states. Source: EIA.

CH

ART 15

Projected California Gasoline Consumption 2003* - 2013

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 14

15

16

17

18

(Bill

ion

Gal

lons

)

* Data for 2003 is actual, not projected. Source: CEC; EIA.

CH

ART 16

Annual Unleaded Regular Grade Gasoline Pump Prices 1986 - 2004*

San Francisco San Diego Los Angeles U.S. Average

185¢ 2004

169¢

183¢ 184¢

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 80

90

100

110

120

130

140

150

160

170

180

190

(Cen

ts p

er G

allo

n)

* Data through February 2004. Note: U.S. Average includes taxes on a California basis.

200¢

1986 1994 1995 1996 1997 1998 1999 2000 2001 2002 2004 1993 1992 1991 1990 1989 2003 19881987

Source: CEC; EIA; OGJ.

CH

ART 17

Pipeline Link to U.S. Gulf Coast Refined Product Pipeline Systems

Kinder Morgan/ Southern Pacific

Pipeline

proposed for reversal

line service scheduled to

an Diego

Los Angeles

Phoenix

Tucson El Paso

LonghornPipeline

Houston Line

Pipebegin Spring/Summer 2004

S

CH

ART 18