High Gas Prices In California
This is happening at a time when the rest of USA is not impacted by a similar increase in rising . Why is it that one location in the country has higher prices than the rest of the US? We take a look.
Why California alone?
Even though part of the mainland, California’s gasoline market is isolated from the rest of the country. California’s refineries get their oil from foreign sources – more than half of which come from Ecuador and Iraq, through its ports. There are no major pipelines or rail infrastructure that serves the Golden state. In case of shortages, there is no way to quickly deliver large amounts of gasoline or oil from other locations in US to California.
California is pressing for cleaner gasoline and has very strict specifications for refining oil. This is a pricier product than the rest of country. While it has improved the state’s air quality, during emergencies, the state stands alone.
The recent oil price spike is the result of a series of accidents and supply disruptions. It all began when a fire shut down BP’s refinery in Cherry Point, Washington. In spring, other plants also reported disruptions for maintenance. By May, West coast gasoline inventories (the stock of oil) had dropped to the lowest levels in 10 years. A fire in August at Chevron’s plant in Richmond, CA, added to California’s problems. Finally on Oct 1, a glitch in the electric grid, caused power at Exxon Mobil’s plant to be turned off. The result was an acute shortage of gasoline in an already tight market where supplies were low.
Law of Demand & Supply
Prices of all products are affected by what economists call "Supply and Demand". To explain it better, imagine there are 20 kids in a clubhouse and only 5 computers available to play your favorite video game. The demand for computers will be far greater than its supply.
Now, imagine if you could use candy to trade computer time. Do you think you will have to give up more candy for the computer time, than in another club house where there are 20 kids and 20 computers? Think of situations where there are 20 kids and 40 computers, or a case where you have an unlimited supply of candy.
You may have rightly guessed that the more the number of computers, the less candy it will cost you. Also if the candy does not have a value for you (unlimited supply) - you may be willing to give whatever it takes to get you the computer time! So you see how the price (number of candy) is a function of supply (availability of computers) and demand (kids). When either the demand increases or there is a supply issue, prices of items tend to go up.
So you can see that the quirks in the California market are responsible for the spike in oil prices. Understanding a local market is usually very useful to understand what causes prices to fluctuate.