A No Jive Diatribe

                          

Should California Create its Own Strategic Oil Reserve?

Despite falling oil prices, gasoline has risen statewide again, specifically this past week before
Christmas and Californians are expressing concerns.

Crude oil prices continue to fall. At one time in December, a barrel was under $34 — the lowest
figure in four years. So, with oil down and people driving less, gas prices have been falling.  So
what gives?

                                   

Energy experts say California refiners are slowing production because people are driving less, the
result of the recession and rising job layoffs. Additionally, BP in Southern California is having
mechanical problems at its Carson refinery, and repairs may take a month or more to complete.

Production of California's special blend of gasoline is down 15 percent from a year ago, from 7.6
 million barrels a day to 6.5 million barrels. And it's been on a downward trend since Thanksgiving.

"Production has been tapering off since the end of November," said Susanne Garfield of the California
Energy Commission, adding that it's at "the lowest rate in five years, and with production down, supplies
might be tightening up."

Until recently, profit margins for refineries were on the decline as well. In late November, companies were
losing 2 to 5 cents for every gallon they refined, but the cutback in output helped turned that loss into a
profit of 21 to 37 cents a gallon, according to the California Energy Commission.

So given that California has to refine a special blend of gasoline 6 months out of the year to meet
environmental regulations, Californians pay more at the pump.  And no matter what the cost of a barrel
of oil trades for, California still has to refine it to a standard that creates yet another supply and demand
curve to be addressed.

Therefore, similar to the federal government, wouldn’t it make sense to keep a strategic reserve of this
special blend thus avoiding the impacts on price elasticity that we are facing today? Given that California
is an oil producing state and given that we are the 8th largest economy in the world if viewed as a nation
state, wouldn’t only seem to make sense?

 
TJohnson@CaliforniaBusinessMinute.com
www.CaliforniaBusinessMinute.com